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SBA Loan Program Dodges A Bullet

The U.S. Small Business Association’s flagship loan program is fast approaching its lending cap, with just five months remaining in the fiscal year. Last week, the Senate’s Small Business and Entrepreneurship Committee took the first step in avoiding a possible lending freeze by passing legislation to increase the cap to $20.5 billion. The proposed bill would raise the authorization limit of the SBA’s 7(a) loan program nearly $2 billion from its current limit of $18.75 billion.

This has been a big year for the SBA’s most common loan. “Just halfway through FY 2015, we are seeing unprecedented loan volume—an indication of a growing small business economy that still cannot find long-term financing from today’s conventional market and so must turn to the SBA 7(a) loan program,” Tony Wilkinson, President of the National Association of Government Guaranteed Lenders (NAGGL), which represents SBA lenders, said in a statement.

For the week ended April 25, more than $11.4 billion in loans have been approved year to date, the highest levels seen since 2011. At the current rate, if the legislation is not approved, the cap could be reached as soon as August. The organization authorized another $345 million in loans from the April 18 report to the latest report on April 25. Without a limit increase, the program would be forced to ration or suspend lending until the start of the next fiscal year on Oct. 1.

An Outdated Program?

Established in 1953, the 7(a) program was designed to help businesses gain access to bank financing. By offering a federal guarantee of repayment, the program encouraged member banks to lend to small businesses, helping businesses that may have otherwise been denied financing to access the funds they needed. In the more than half a century that followed, more innovations and options have entered the small-business lending space.

Banks, once the only choice for small businesses in need of capital, now face competition from an ever-growing alternative finance segment. Growing rapidly, the alt-lending industry has more than doubled its value in a few years and is now approaching the $500 billion mark in valuation. Filling the gap left by traditional lenders in the wake of the Great Recession, alt-lenders flourished. As the economy has stabilized, banks regained an edge over alternative lenders in the SME market, but the gulf between them may be closing. Quickly maturing alt-finance markets in Europe and the rise of tech-savvy millennials in the workforce could reignite the demand for non-bank lending.

In addition to increased competition, the 7(a) loan program may fall victim to its own success. Loan amounts are consistently getting larger. Year to date, 31 percent of loans are for values more than $2 million. Critics contend that businesses seeking such large amounts don’t need the support of government-backed loans. This sparks a larger debate over the role of government in private sector financing decisions. The implications over this subject are currently playing out over the continued existence of the Export-Import Bank. The government export credit agency will be forced to stop doing business if Congress does not reauthorize it before Sept. 30.

For its part, the SBA is trying to modernize its programs and image. Earlier this year, the organization unveiled a new online portal to connect businesses with lenders. Other changes include a new push to support startups and other cutting-edge entrepreneurs.

The SBA’s 7(a) program doesn’t appear to be at risk. Congress has increased the cap for the program multiple times—most recently in September 2014. The pending bill also includes a provision to increase next year’s allocation to $23.5 billion.

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