A Changing Environment for SBA Lending

All Industries

Jan 15, 2024, 09:47 ET


The Small Business Administration (SBA) backed more than 57,300 7(a) loans worth $27.5 billion to small businesses in FY23, according to the SBA’s end of fiscal year report. In total, SBA said that nearly 70% of its 7(a) loan volume (more than 39,000 loans) were small-dollar loans of $350,000 or less, with the program originating more loans under $150,000 in FY23 than in FY22, FY21, and FY20 — an overall 45% increase since President Biden took office.

American small business owners turn to the SBA for loan guarantees when credit tightens and they find it harder to find conventional bank funding. The good news is that the rates for these loans are relatively low.

But this year, it was just traditional banks making SBA loans. In FY23, for the first time in more than 40 years, the SBA awarded new Small Business Lending Company (SBLC) licenses to non-depository lenders that serve under-resourced markets across the U.S., including rural and Native communities, and communities experiencing persistent poverty.

SBA said the expansion of this program will create more competition in the lending marketplace, allowing entrepreneurs to pursue the best possible deal for the capital they need to start and maintain a thriving business.

The changes that helped spark the increases
The runup in SBA lending is being driven by two changes in the business environment. First, the economy in general, while still growing with a strong jobs market, is still approaching a possible recession. This has banks concerned and is causing them to be stricter on their requirements for conventional financing.

The second factor are the changes the Administration made to the SBA loan program back in May of this year, which began making it easier for businesses to apply for funding from SBA.

The changes went into effect on May 11, 2023, and were aimed at streamlining the loan application process, expanding the number and types of lenders, and relaxing regulations in order to reach more small businesses, especially those in underserved communities.

According to some reports, these changes led some to believe the new rules signify the end of the SBA’s prudent lending practices and could increase defaults, which would ultimately fall to the taxpayer to cover.

Dealing with increased small business lending risk
It’s too early to tell whether or not the SBA’s recent changes will actually result in more risk in the government’s program. What we do know is that prudent lenders are not waiting for signs of a problem before going to work mitigating all possible risks in their current small business lending program.

As one of the nation’s leading risk management outsourcing companies, we’ve already seen an increase in requests from lenders for pre-funding inspections of small businesses. If the new rules do lead to more problem loans, prudent lenders are making sure that the increased risk doesn’t come from their lending process.

Because we have many thousands of trained field services professionals in our national network, it’s easy for any lender to order a field inspection and get back detailed information about their small business customers and their businesses.

When a lender sends us out, either at the beginning of the relationship or when a borrower becomes delinquent, we’re able to establish contact, help the lender deepen a valuable relationship and come back with valuable information about the status of the borrower and business.

If you’re involved in small business lending and your SBA loan volume is ticking up, reach out to us today to find out how easy it is for NCCI to help you mitigate any risks in your program. We welcome the opportunity to visit with you, without cost or obligation.

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