In a bid to win support among moderate lawmakers for its Build Back Better plan, the Biden administration agreed to more than halve the budget for a proposal that would let the Small Business Administration make direct loans. But even a hefty budget cut isn't enough to appease the banks and credit unions that oppose the plan.
The funding for direct SBA loans was slashed from $4.5 billion to $1.965 billion in the revised spending plan. The program allows the SBA to make 7(a) loans of $150,000 or less to disadvantaged small businesses that struggle to obtain credit from private-sector lenders. Under the 7(a) program, the SBA guarantees loans of up to $5 million that banks and credit unions make to borrowers who meet certain eligibility requirements.
Smaller lenders, especially credit unions, see the SBA's direct-lending plan as direct competition, even if it's narrower in scope now than the original proposal.
“The problem we’ve had with it is the concept of SBA making loans directly and moving away from the public-private partnership that it used in the Paycheck Protection Program and obviously the current 7(a) program,” Brad Thaler, vice president of legislative affairs at the National Association of Federally-Insured Credit Unions said. “That’s where our real concern with the provision lies. Nothing changes.”
Proponents of the program say that the declining number of smaller loans available through SBA’s regular business programs or via conventional bank loans merits a more active role for the SBA.
But there are other ways to address access-to-capital concerns than to have the agency compete with private-sector lenders, according to Paul Merski, group executive vice president for congressional relations and strategy for the Independent Community Bankers of America.
"You could work with different guarantee levels and different fee structures to reach [more] small-dollar borrowers … That discussion would be more productive than just doing direct lending," Merski said.
The Consumer Bankers Association and American Bankers Association also remain steadfast in their opposition to SBA direct lending.
“We have real concerns with any SBA direct lending program that competes with banks,” ABA spokesman Ian McKendry said. “We all want to help more small businesses succeed, but continuing to bolster the successful 7(a) program is a much better investment of time, energy, and resources than creating a new SBA program that could undermine 7(a)."
The budget legislation gives SBA the authority to partner with financial institutions as part of the effort to serve smaller, disadvantaged businesses. Though agency officials haven’t disclosed any plans to move in that direction, bank and credit union advocates across the spectrum have declared their willingness to work with the agency.
“Community banks punched way above our weights during PPP,” Nimi Natan, president and CEO of Gulf Coast Small Business Lending, a unit of the $2.6 billion-asset Gulf Coast Bank and Trust Company in New Orleans, said. If there was a similar program targeting smaller, disadvantaged borrowers, “we would do the same thing,” Natan added. "We have a strong sense of obligation to underserved borrowers.”
The SBA’s two biggest regular loan programs, 7(a) and 504, delivered a record $44.8 billion of capital to small-business borrowers during fiscal 2021, which ended September 30. Prior to that, their biggest year was fiscal 2018, when the agency delivered a total of $30.1 billion.
“In the midst of a once-in-a-generation pandemic, the SBA’s mission-driven team delivered a record number of SBA’s traditional loans to our nation’s small businesses — in addition to more than $1.1 trillion in COVID-related relief since the start of the pandemic,” SBA Administrator Isabella Casillas Guzman said in a Friday press release.
At the same time, Guzman noted the flagship 7(a) program actually guaranteed fewer loans of $150,000 or less last year than it did in fiscal 2020, when the coronavirus pandemic led to a decline in the SBA’s traditional lending programs. The SBA guaranteed 18,293 loans of $150,000 or less under 7(a) in fiscal 2021, down 7.4% from fiscal 2020.
By contrast, the number of loans between $350,000 and $2 million increased 62%, to 18,589. According to the SBA, the decline in the number of small-dollar loans has a disproportionate impact of Black and Hispanic businesses, since they are often more likely to need capital in smaller increments.
“Historic inequities in accessing capital persist, and we must do more to lower the barriers of entry to opportunity for all our entrepreneurs,” Guzman said.
According to the SBA, closing systemic gaps in capital access for underserved small businesses is Guzman's “north star.” Agency officials promised to make the issue a top priority in fiscal 2022.
“The SBA continues to make headway in helping small businesses access much-needed capital, but much more work remains to be done,” Patrick Kelley, associate administrator for the office of capital access, said in the press release.
While neither Guzman nor Kelley mentioned direct lending in the release, backers are promoting the idea as an antidote to the small-dollar loan gap.
The SBA “has been relying on third parties to make the lending decisions on 7(a) and those third parties are opting not to make small loans, especially in rural and underserved communities,” Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce, said. “That does not accrue to the benefit of the smallest businesses.”
According to Thaler, credit unions that do SBA lending tend to focus on smaller businesses, so they see SBA’s direct-lending initiative as a competitive threat.
“The SBA is kind of coming into where the credit union sweet spot is,” Thaler said. “We recognize that more needs to be done [to reach underserved small businesses]. We’re trying to do more, but the SBA is saying `We want to do this.’ They’re going to drive credit unions out of this important space.”
Congressional Democrats continue to push hard for direct 7(a) lending — even on a smaller scale — banking lobbyists said.
"I haven't seen any hedging or backing down from this proposal," Merski said.
While the threshold for the planned direct loans remains unchanged at $150,000, “the real niche would be much lower than that amount,” Knapp said.
Banks and other private-sector lenders have difficulty serving smaller businesses since their owners frequently lack cash or collateral to secure loans, and their credit histories are often problematic. For such borrowers, lending decisions “can’t be based primarily on credit scores or other traditional underwriting criteria,” Knapp said.
At least one banker agreed.
“We as an industry don’t focus much on loans below $300,000,” Gulf Coast's Natan said. “What has happened the past six or seven years is that the average [7(a)] loan size has increased.”
Gulf Coast’s average 7(a) loan is between $800,000 and $900,000, according to Natan.
“My gut reaction was that SBA has no business doing direct lending,” Natan said. “Then I had a chance to reflect and I realized the SBA is trying to serve people we don’t get to."
More often than not, however, bankers and credit union executives have voiced strong opposition to a direct lending role for SBA. Direct lending could actually be counterproductive, since the agency would be hard-pressed to offer the full suite of services small business owners need, including in-depth counseling, according to John Buhrmaster, president and CEO of the $650 million-asset 1st National Bank of Scotia in Scotia, New York.
"The current administration seems to think that SBA lending can be like PPP, or even online credit card lending. They are dead wrong, it is not even close," Buhrmaster said. "Let the experts, community bankers, make the loans in a responsible manner. We just proved we could do it in record numbers."
