Earlier this year, SBA administrator Linda McMahon told Inc. magazine that her agency is "the best kept secret in the country." If entrepreneurs keep going to the wrong banks, it may stay a secret.
Large banks like Wells Fargo are often lauded as active Small Business Administration lenders. And, in fact, they do process a significant volume of SBA-backed loans, which offer entrepreneurs lower interest rates and down payments, and longer repayment terms than ordinary bank loans. But the large banks' numbers are less impressive when compared with much smaller banks, some of which specialize in such loans.
After the recession, many large banks stepped away from small-business loans, although they have been returning to that business over the past few years. But small-business loans are less profitable and riskier than larger loans made to bigger businesses.
"Large banks don't have to lend to small businesses to survive," says Ami Kassar, CEO of MultiFunding, an Ambler, Pennsylvania, business that helps small and midsize companies find debt financing. (Kassar is also an Inc.com columnist.) That means some big banks are less likely to introduce and explain SBA-backed loans to clients, says Kassar. Since most small-business owners get lending information from their bankers, and many patronize local branches of large banks, they may never even learn such loans are an option.
To illustrate the disparity, MultiFunding recently conducted a study of SBA lending activity that uses the number of a bank's branches as a proxy for its size and reach. Among the 10 largest banks based on assets, TD Bank generated the most 7(a) loans (the SBA's most popular program) in 2017, with an average of three per branch. Wells Fargo ranked second, with an average of one SBA loan per branch in 2017.
"It's important to note that SBA lending is only a portion of our total small-business lending, and retail branches are just one of Wells Fargo's delivery channels to serve the lending needs of small business owners," says Jim Seitz, Wells Fargo's communications manager for small business and business banking. "Wells Fargo is committed to SBA lending in every market we serve, with a dedicated SBA lending team to meet the needs of small businesses across the United States."
Bank of America ranked last among large banks on MultiFunding's ranking, producing on average one SBA-backed loan for every 30 branches. Don Vecchiarello, a spokesman for Bank of America, also emphasized that the company is very active in the small-business market generally. He says the company's SBA loan business represents just 5 percent of its substantial small-business offerings--and that it is a growing part.
"Since 2015 we have tripled the number of people we have working in our SBA group," says Vecchiarello. "As far as the 7(a) product, in 2016 we have nearly doubled the amount of loan production." The company is also a perennial top five lender in the SBA's 504 program to finance the purchase of fixed assets.
Still, compare those results with three single-location institutions: Celtic Bank, in Salt Lake City, which approved 1,417 loans in 2017; Independence Bank, of East Greenwich, Rhode Island, which approved 1,141; and Live Oak Bank, in Wilmington, North Carolina, which approved 1,055. Several non-bank lenders, such as Newtek and Readycap Lending, also outperformed big banks.
Live Oak Bank, founded in 2008 to provide SBA loans to veterinary practices, is online-only, which MultiFunding counts as a single branch. Today, the company serves 19 vertical niches, and about 63 percent of its loans are SBA-backed.
"There are some industries where business owners have historically received SBA loans, and so in those industries they have a little bit more knowledge," says Mike McGinley, group general manager for Live Oak Bank. "In our average industry, though, we have to do a lot of education." Health care, accounting, and agriculture businesses are among those often in need of introduction to the SBA program. The company also created an online tool to significantly streamline the process.
For its part, the SBA has been trying to make its loan programs more visible. McMahon recently finished a tour of communities around the U.S., during which she promoted the SBA's products and services, including the loan programs. And the agency launched an online tool to match small-business owners with SBA lenders. But "the SBA can't really control what Bank of America does or does not tell their clients," says Kassar.
Of course some small-business owners who know about SBA-backed loans choose not to pursue them because they're put off by the paperwork.
"It can be a real pain in the rear end," says Kassar. "But if you can get 10 years, rather than five years, to pay back a loan, and it takes you a few extra hours of paperwork, that is probably worth it."
In the end, the message isn't small-banks-good/big-banks-bad, says Kassar. Rather, it is find the right bank for you. That could be a large provider. "We are big fans" of SBA loans, says Tom Pretty, head of SBA lending for TD Bank, where 7(a)s make up 41 percent of small-business loan activity. "We go out of our way to show customers all the different options."
Small-business owners should ask about a potential lender's experience with SBA-backed loans and how many they approve, Kassar recommends. And avoid throwing in the towel too early. "Don't assume that just because one bank did not mention the SBA or told you that you were not qualified that that is gospel," says Kassar. "If you were told that by five banks, then that is probably not for you."