SBA loan sizes keep falling as banks lean into small-dollar lending

The average size of a Small Business Administration 7(a) loan continues to plummet. 

Nearly a month into the agency's 2025 fiscal year, which began Oct. 1, the average 7(a) loan size is $407,000, down from $443,000 in fiscal 2024. It was $480,000 in fiscal 2023.

The decline comes as more lenders embrace issuing small-dollar credits, defined by SBA as loans of $500,000 or less. 

The New Canaan, Connecticut-based Bankwell Financial Group recently launched a small-dollar lending initiative. Newity, the Portland, Maine-based Northeast Bank's SBA origination partner, said the program the pair unveiled in January 2022 took flight the second half of fiscal 2024. Live Oak Bank is gearing up to do the same. 

Newity expects to originate as many as 600 small-dollar 7(a) loans each month for Northeast going forward, co-CEO Luke LaHaie said in an interview, adding the level of demand surprised him. "Business owners, they really want this product," LaHaie said. "There's just immense demand. We're getting like 10,000 applications a month."

Similarly, Live Oak's small-dollar effort just surpassed $100 million in total production. The Wilmington, North Carolina-based lender expects to reach $125 million by the end of the 2024 calendar year and then accelerate from there. "I think this is a $500 million to $1 billion a year production business over the next couple of years," President BJ Losch said Thursday on a conference call with analysts to discuss his company's third-quarter earnings.

Under 7(a), SBA provides guarantees ranging from 50% to 85% on loans participating lenders make. It is SBA's largest lending program, counting more than 70,000 loan approvals for $31.1 billion in fiscal 2024. Banks make up most of the more than 1,500 participating lenders. 

During the COVID-19 pandemic, the agency waived guarantee fees and actually made several months of principal and interest payments on borrowers' loans. While the mix of payments and fee waivers helped support SBA programs during a difficult time, they also appeared to incentivize larger loans. Average loan size, which had been $446,000 in fiscal 2019, jumped to $533,000 in fiscal 2020. It increased further, to $705,000, in fiscal 2021.

Promoting small-dollar lending has been a touchstone of SBA Administrator Isabel Casillas Guzman's three-and-a-half-year tenure. Guzman has called making more small loans critical to increasing capital access to minorities and other disadvantaged groups, who tend to need smaller amounts than more established firms. However, Guzman's favored remedy, a resumption of direct lending by the agency to borrowers, has been hotly contested by banks and credit unions. While the SBA still possesses the authority to lend directly, it has not done so since 1998, according to the Congressional Research Service.

Like LaHaie, Rohit Arora, co-founder and CEO of the small business lending platform Biz2Credit, has seen increased demand for what he termed "small-ticket small business loans." While that creates opportunities, they come in a segment of the market banks have historically steered clear of. Arora, whose Biz2Credit has provided more than $10 billion of small business financing over the past 17 years, said in an interview that bank lenders typically avoid doing loans under $250,000, reasoning small deals "take just as much time and effort as larger loans which are more profitable." Smaller companies fail at higher rates and frequently lack collateral, Arora added. 

"More often than not, banks figure they can connect with small-dollar borrowers down the road, when their companies are more established," Arora said. "Now, though, technology is yielding clearer insights into small firms' cash flows, making it easier to underwrite small-dollar loans. With Open Banking regulations coming in, it will make cash flow-based lending more relevant also from a platform like ours."

Newity has sought to benefit from improved technology, as well as simplified SBA underwriting requirements, as it planned its small-dollar program. SBA "took a real streamlined approach to loans $500,000 and under and helped [make it easier] for the borrower for sure and also for the lender," LaHaie said. 

LaHaie admitted it took Newity longer than planned to build what he described as an "end-to-end" platform for small-dollar lending. Once the job was finished, though, "everything kind of came together," LaHaie said. Beginning in the spring, Newity and partner Northeast increased their operational tempo, finishing the 2024 fiscal year with 2,552 approved 7(a) loans for $289 million. In fiscal 2023, Northeast was credited with 448 7(a) approvals for $31.7 million. The partnership has gotten off to an even faster start in fiscal 2025. Indeed, through Oct. 28, Northeast ranks as the nation's number-one 7(a) lender by deal volume with 659 approved loans for $103 million. 

"We've got about 100 people," LaHaie said. "This is all we do, small-balance working capital loans with Northeast Bank. That's the product."

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According to LaHaie, it takes Newity about 10 minutes to prequalify borrowers. The process of collecting required documents, underwriting and funding loans takes longer. "Internally, we talk about three weeks from start to finish. Twenty-one days is our overall goal," LaHaie said. Live Oak is "approving loans by and large between four business days and 12 business days," Losch said, adding the bank hopes to reduce turnaround time as it fine-tunes its processes and technology. 

Newity's relationship with Northeast goes back to 2020, when the firm was involved in helping Northeast originate Paycheck Protection Program loans. Newity pivoted to SBA lending as PPP wound down. After four years, the partnership remains tight. "They've been great," LaHaie said of Northeast. "They're fully committed to the program and want to keep growing it."