I recently spoke with Charles Green, a seasoned commercial lender with over 35 years helping small business owners find success navigating the SBA loan process and otherwise financing their small businesses. He’s currently the Managing Director of the Small Business Finance Institute (SBFI) and is the author of several books, his most recent being a Banker’s Guide to New Small Business Finance.
While his current focus at the SBFI is helping commercial bankers understand the new landscape of small business lending and how to better help their small business customers, his experience working with the SBA’s loan guarantee program gives him insight from an experienced banker’s perspective, which I think is valuable to small business owners.
Ty Kiisel: Charles, it’s been a busy couple of years for the SBA. This year, for example, Maria Contreras-Sweet has been traveling the country promoting the new LINC tool, an expanded relationship with Credit Unions, and otherwise bringing the SBA into the 21st Century by introducing new technology to streamline the loan guarantee program. Do you think these changes are making a difference?
Charles Green: Under the leadership of Maria Contreras-Sweet and her predecessor Karen Mills, the SBA has progressed with incredible speed over the last five years by embracing new technology that is making the SBA loan guarantee program more accessible and more relevant to small business owners. For example, SBA.gov has added more resources to help users in the last five years than the rest of the government’s website properties combined. This is not your father’s SBA.
Ty: What exactly does the new LINC tool offer small business owners?
Charles: Business owners who use LINC are connected with lenders in their area that participate in the SBA’s loan guarantee program. It gives borrowers visibility into which banks are making SBA loans and which might be a good place for a business owner to apply for a loan. The goal is to help reduce the time it takes a business owner to find an SBA lender—since all banks don’t participate in the program.
Ty: LINC isn’t the only new technology the SBA has introduced over the last couple of years; they’ve also encouraged third-party players to help streamline the process too, haven’t they?
Charles: Yes. You could describe it that way. The SBA has taken a bad rap for forcing borrowers to wade through reams of paperwork to apply for a loan, but all that paperwork was really borne by the banks, not the borrower. Over the last five years the SBA has been consolidating the paperwork required for an SBA loan. Technology platforms like SmartBiz, are putting applications online and otherwise making it easier for banks to make SBA loans—and thus encouraging banks to make more of them.
Ty: This isn’t a technology question, but over the last year or so the SBA has been encouraging their participating lenders to offer smaller dollar loans within their 7(a) loan program by removing fees on loans of $150,000 or less. Is it making a difference?
Charles: Over the last 20 years, most banks wanted to write SBA loans of $250,000 or more. They are more profitable and the smaller loans to smaller companies are just riskier for the banks. And, in 2011, when the SBA was authorized to increase the size of the SBA 7(a) loan program to as much as $5 million, the average loan size started to steadily increase from there. By doing that, the SBA was trying to encourage banks to continue to make small business loans through the loan guarantee program after the start of the Great Recession, but the smaller dollar loans needed by many Main Street businesses became casualties.
By removing fees to both borrowers and lenders, the SBA is encouraging banks to make more of these smaller loans by making them more profitable for the banks and easier for the banks to qualify the borrowers. It appears to be working. Bankers are writing more SBA loans of $150,000 or less. The SBA reported that these loans were up by 15 percent in the first six months after dropping the fee.
Ty: How does the push to get credit unions more involved fit into the equation?
Charles: The recent relationships Contreras-Sweet has formed with the two credit union trade associations is another way the SBA is trying to encourage these smaller loans. As an industry, credit unions have increased business lending by 25 percent over the last three years. Because credit unions often work with the smaller businesses looking for this type of loan, I think it’s a natural fit.
Ty: The 7(a) loan program has been in the news lately regarding the potential suspension of lending and the subsequent re-authorization of the program that took place last month. The news was basically reporting they had run out of money—that’s not an accurate description, is it?
Charles: No, it’s not a good description. There is a very real misconception about the SBA that most people don’t really understand. There is no financial appropriation within the budget to pay for credit losses against SBA loans. The SBA has been a zero subsidy program since 2004.
Last month the SBA didn’t run out of money, they just weren’t authorized by Congress to go beyond the $18.75 Billion limit set for the year. It was pretty clear in March they would likely exceed the cap, but Congress was slow to act. In June alone they experienced a $2 Billion increase in approved loan volume—that’s roughly 10 percent of the entire authorization for the year.
Fortunately, Congress can take action when they need to and increased the authorization to $23.5 billion for the remainder of 2015 and 2016 as well, even though their inaction created a lot of negative attention.
The SBA loan guarantee program might not be the biggest source of financing for small businesses, but I believe they are an important source of capital for many businesses that might not find success in other places and set the tone for a lot of other small business lending. You can read more about the SBA loan guarantee program, HERE.