Opening the Small Business Administration's flagship 7(a) loan guarantee program to more nonbank lenders has been a top priority for Administrator Isabel Casillas Guzman, so there was plenty of fanfare last year when SBA ended a four-decade moratorium on nondepository small-business development companies.
Now, the policy appears to be in doubt.
Lisa Jacobs, CEO of Funding Circle, said earlier this month that the company plans to focus on its more profitable U.K. business, leaving fewer dollars available for SBA lending. The London-based company was one of three fintech lenders to
"We don't believe it's the best use of our capital to invest in those loans in the U.S. business," Jacobs said during a conference call with analysts. "We believe that a simpler, more profitable combined U.K. business will deliver greater shareholder value with improved profitability and cash generation."
Jacobs spoke after Funding Circle reported losing approximately $5 million in 2023 before interest, taxes, depreciation and amortization. Though Funding Circle insists it is on track to begin 7(a) lending next month, Jacobs' comments ignited a firestorm among lawmakers in the House and Senate, many of whom remain sharply critical of the SBLC policy, which SBA implemented by regulation in April 2023.
"Based on the SBA's recent track record, I have zero confidence in the agency to do proper due diligence on SBLC risk," Sen. Joni Ernst, R-Iowa, ranking member of the Senate Small Business Committee, said during a hearing Wednesday.
"It's a pretty easy question to ask. Why would the SBA approve such an organization that had such mounting losses?" Rep. Dan Meuser, R-Pennsylvania, said Wednesday at a separate hearing of the House Small Business Committee.
"Hopefully the level of comfort [with the SBLC policy] isn't as high as it was before," Meuser added. "Hopefully there's some healthy paranoia taking place that we don't want this to happen again."
Guzman testified before both the House and Senate committees. On Wednesday, the agency also came under fire on a second front as GOP lawmakers blasted its plan to resume direct lending, a
Pushing ahead with SBA plans
Besides Funding Circle's decision to focus on the U.K., the company has also disclosed that it has received what Ryan Metcalf, a spokesman, termed "expressions of interest" from third parties about its Denver-based U.S. operations. The company's board is evaluating the outside inquiries, but the process is in the early stages and doesn't impact the company's plans to begin SBA lending, which could occur as early as next month, Metcalf said Wednesday in an interview. He added that "Funding Circle USA remains more than sufficiently capitalized to meet the requirements of the SBA" and that the company intends to launch its SBA business as soon as April.
Metcalf rejected concerns voiced by some lawmakers that Funding Circle intends to use the SBLC license as a bargaining chip in sale negotiations. "Funding Circle does not intend and has never intended to immediately turn around and sell the license or use it as a bargaining chip," Metcalf said.
Funding Circle has lent $4.5 billion to 45,000 small businesses since entering the U.S. market in 2013.
Prior to 2023, SBA had restricted participation in the 7(a) program — which has guaranteed more than $65 billion in loans since October 2021 — to just 14 small-business lending companies as part of a longstanding moratorium on nonbank, non-credit union lenders, originally implemented in 1983. The agency signaled its intent to lift the moratorium in October 2022. SBA
On Wednesday, Guzman defended the policy, intended to widen access to capital by minorities and other underserved groups, in testimony before the House Small Business Committee.
"We have still persistent gaps in the marketplace, for startups, for underserved markets overall, in rural deserts around the country," Guzman said. "Our SBLCs perform to fill market gaps. Our goal is to expand that program. Adding three licenses for the first time in 40 years. … We viewed that as a responsible expansion."
Direct lending redux
In addition to moving forward with the SBLC policy and Funding Circle's application, Guzman acknowledged Wednesday that SBA would like to renew its push for direct lending authority, noting funding to do so is included in President Joe Biden's fiscal 2025 budget plan.
"If given the tools to be able to properly implement direct lending, then we would be able to do that," Guzman said in testimony before the Senate Small Business Committee. "The fiscal 2025 budget would create that authority. … We do need to fill these capital gaps for entrepreneurship to continue to thrive and we're looking forward to working with Congress on a positive solution for direct lending."
The Biden administration proposed giving SBA nearly $4.5 billion to make direct small-dollar 7(a) loans in September 2021, but
"In this case [SBA] would be the lender, underwriter and the guarantor, which puts the agency in direct competition with the private sector," said Sen. Ted Budd, R-North Carolina.
"My colleague and I demand the administration rein in its reckless lending rules and stop issuing new SBLC licenses," Ernst said. "And no, this does not mean the SBA should replace one disaster with a bigger one like a direct lending program."
Ernst joined a group of 11 Republican senators co-sponsoring a bill introduced Wednesday by Sens. Tim Scott, R-South Carolina, and John Kennedy, R-Louisiana, that would bar SBA from making direct 7(a) loans.
"The government shouldn't crowd out private lenders that are already doing a good job getting funds to the small businesses that need them," Kennedy said in a press release.
Interestingly, in light of Guzman's comments about credit gaps, private 7(a) lenders have significantly increased lending to Black and Hispanic borrowers in recent years. So far in fiscal 2024, which began Oct. 1, about $586 million, or 7.6% of 7(a) lending volume, has gone to Black borrowers. That's an improvement over fiscal 2021, when Black borrowers received less than 5% of the program's lending volume. Loans to Hispanic borrowers have seen a similar increase, jumping from 8.4% of total loan volume in fiscal 2021 to 12.8% in fiscal 2024.
Scott sponsored similar legislation in the 117th Congress, from 2021 to 2023. The current version of the Protecting Access to Credit for Small Businesses Act is endorsed by the American Bankers Association, Independent Community Bankers Association, Community Bankers Association, Bank Policy Institute and America's Credit Unions, according to the press release Scott and Kennedy issued Wednesday.
