Getting Credit to the Smallest Businesses
In a bid to get more loans to some of the neediest small-business owners, the Small Business Administration's budget for 2014 eliminates fees on some of its smallest loans, and the agency plans to shrink the piles of paperwork required from banks and borrowers.
The changes primarily impact the SBA's 7(a) guaranteed loans, a flagship product that supports more than $27 billion in funding annually for purposes as diverse as capitalizing a start-up or financing ongoing operations. The new budget also can potentially bring back a popular refinancing program folded into the agency's 504 loans that was launched during the recession and was used for large commercial mortgages.
"As banks were coming out of the credit crisis, they put their credit and resources toward the largest loans, and we want to make sure that as the economy improves, we incent banks and borrowers to take advantage of the loan programs on smaller dollar sizes as well," says Jeanne Hulit, an assistant administrator for the SBA.
The sequestration cuts this winter slashed 12 percent from the SBA's 2014 budget of $810 million. Still, the budget waives all fees for businesses seeking 7(a) loans of $150,000 or less. As part of the American Recovery and Reinvestment Act in 2009, the SBA also temporarily waived fees on its 7(a) loans to spur more lending, which it accomplished.
Though SBA lending fell dramatically during the recession, it has rebounded. The agency has come off two record years for 7(a) loans, originating more than $30 billion in both 2011 and 2012.
The smallest loans, however, make up a smaller portion of that pie. From the beginning of the year through April 12, the number of small-business loans of $150,000 or less decreased 24 percent to 12,578, compared with the same period two years ago, according to the SBA.
Starting in October, the beginning of SBA's fiscal year, the agency will eliminate loan-origination and servicing fees, as well as the 0.55 percent charged to the bank lenders annually to pay for their government guarantee. The highest guarantee on loans less than $150,000 is 85 percent.
Paperwork for the loans, which can run to 100 pages, is also a burden, and this year the SBA experimented with reducing that burden for its Small Loan Advantage program, which originates 7(a) loans of $350,000 or less.
Since June 2012, loan origination under the SLA program has jumped to $55 million a month from about $5 million, according to the SBA.
Hoping to take things a step further, the SBA's 2014 budget asks for $7 million to consolidate the 7(a) loan-application and servicing process into one system, called SBA ONE. The process will become entirely digital.
That appeals to banks like Wells Fargo, of San Francisco, which is the largest SBA lender in the U.S. and has participated in the SLA program.
"Small loans are a challenge in the sense that there is a lot of demand and we have to find the most efficient way to process those," says Chris Ledesma, vice president of strategy for Wells Fargo SBA Lending. Ledesma says Wells's small-loan-origination activity is up this year, but he did not specify by how much.