What's driving the slowdown in SBA lending

Volume in the Small Business Administration's flagship lending program fell for the second straight year as more borrowers qualified for conventional loans.

Lenders made $23.2 billion in 7(a) loans during the 2019 fiscal year, which ended on Sept. 30. The total was an 8.7% decline from a year earlier. The program's volume peaked at $25.44 billion in the 2017 fiscal year.

SBA officials said they had anticipated a drop-off.

“With a strong economy and historically solid small-business optimism, we know that 7(a) lenders are making loans conventionally without the SBA guarantee,” acting Administrator Chris Pilkerton said.

While the SBA currently has a favorable view of the economy, it has become increasingly concerned about the future. The agency successfully lobbied Congress to earmark $99 million to cover the 7(a) program's credit costs in fiscal year 2020. The subsidy averted a shutdown that would have taken place last week.

The numbers for the 2019 fiscal year may have also reflected the impact of the partial government shutdown that kept the agency shuttered for 35 days in December and January.

SBA volume, though down overall, increased at a number of established lenders.

Live Oak Bancshares in Wilmington, N.C., topped the list of 7(a) lenders for the second straight year, after making 913 loans totaling $1.35 billion. The company's 7(a) volume totaled $1.27 billion in the 2018 fiscal year.

The $4.3 billion-asset company has taken several steps to make its loan relationships more profitable. As interest rates were rising, Live Oak opted to hold more SBA originations on its balance sheet.

Live Oak has also been expanding the products it offers small businesses, Huntley Garriott, president of the company's bank, said during a recent conference in St. Louis hosted by the Federal Reserve.

“The battleground in commercial banking is around treasury management, inventory, receivables and cash management,” Garriott said during a panel discussion. “People need the ability to see all that in one place. We're on a mission to try to build that.”

Like Live Oak, KeyCorp in Cleveland is using 7(a) to drive broader small-business growth. The $145 billion-asset company, which created a small-business wellness index in June, was the 11th most active 7(a) lender, originating 551 loans totaling $312 million.

“While our recent results and longstanding commitment to small businesses is clearly validated through our national rankings, this only tells part of the story,” said Jim Fliss, KeyBank’s national SBA manager. “Our mission is to develop strong relationships with business owners.”

Huntington Bancshares in Columbus, Ohio, topped the list when looking at the total number of loans approved. The $108 billion-asset company originated nearly 3,600 loans in the 2019 fiscal year, with an average size of $178,200.

Though Wells Fargo was the runner-up in dollar volume and approved loans, the San Francisco-based company's dealings in the 7(a) program fell short of prior year totals. Total 7(a) originations at the $1.9 trillion-asset company fell by 19%, to 3,149 loans, while overall volume decreased by 35%, to $786 million.

Despite the downward trend, a Wells Fargo spokesman said Thursday its commitment to SBA lending remains as strong as ever.

"Wells Fargo has a long history of serving business customers of all sizes and helping them obtain the capital they need to start and grow their businesses," Chris Ledesma, senior vice president strategic planning with the bank's SBA Lending Group, said. "In addition to the 7(a) and other SBA programs, we will continue working with businesses to build relationships and identify the right products and services that best fit their needs."

More than 1,800 lenders participate in the 7(a) program, though the vast majority are banks.

Volume in the SBA’s other major lending effort, the 504 Certified Development Company program, increased by 4.3% from the 2018 fiscal year, to $5 billion.

William Manger, associate administrator for capital access, said a recent decision to extend the maximum term of a 504 loan from 20 years to 25 years contributed significantly to the uptick. He also pointed to the "low fixed interest rate that the product provides to small businesses."

Unlike 7(a) loans, which are originated and funded by private lenders and backed by the SBA, 504 deals are more complex. Borrowers provide a down payment of at least 10%, a certified development company kicks in 40%, and a third-party lender, typically a bank, provides the remaining 50%. The third-party lender has a first lien on financed assets.

The maximum loan amount for the 7(a) and 504 programs is $5 million.

The 7(a) program is off to a strong start in the early days of the current fiscal year. Through Oct. 4, volume totaled $319 million, up 40% from the same period in the 2019 fiscal year.