The U.S. Small Business Administration is one of the few government agencies that remains popular with community banks.
The SBA's 7(a) program has become so widely used that several industry experts believe the agency's lending authority for the next fiscal year, which starts Oct. 1, should increase from its $17.5 billion limit.
The existing cap "will probably handle the needs for this fiscal year," says Arne Monson, president of Holtmeyer & Monson, a firm that provides SBA lending services to banks. "But the program has become increasingly popular so it might make sense to expand that in future fiscal years."
In the proposed budget for the next fiscal year, the SBA would have the same 7(a) authorization that it has for fiscal year 2014. The National Association of Government Guaranteed Lenders and other industry groups want the amount increased to $19 billion.
"There is no magical formula" to determine the SBA's lending authority, says Tony Wilkinson, the association's president and chief executive. "We've been close in past years to hitting it."
The number of 7(a) loans approved this fiscal year, through Feb. 28, has increased by around 1.5% compared to a year earlier, according to SBA data. Gross approvals for those loans fell by more than 1%, to $6.5 billion.
The volume decline is largely because of last October's federal government shutdown, Wilkinson says. Lenders in September fast tracked requests for hundreds of millions of dollars of 7(a) loans to beat the shutdown. Normally those loans would have been approved during the current fiscal year, Wilkinson says. Still, activity is accelerating to the point that the SBA will likely come close to hitting its lending cap by Sept. 30, he says.
"When the program stays at modest levels as it has in the past, it doesn't allow for as much growth as you would like," says James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. "The program provides necessary and solid tools for the banking system and the borrower."
The SBA doesn't comment on pending legislation and declined to comment, a spokesman says. Still, Marianne Markowitz, the SBA's acting administrator, wrote in a recent blog post that the proposed budget "builds on SBA's proven track record of assisting America's small businesses" by supporting more than $32.5 billion in small-business financing.
Many bankers also embrace the 7(a) program.
"I'm a big advocate of the program," says Paul Patout, president of the $359 million-asset Gulf Coast Bank in Abbeville, La. "When you have a startup like a restaurant that is having trouble getting financing, it is a great program that allows us to minimize the risk."
The proposed budget also continues to waive fees for 7(a) loans of $150,000 or less as part of an effort to encourage lenders to make smaller loans. Larger loans backed by the SBA have rebounded faster after the recession than smaller ones. Lenders often focus on bigger credits because the time it takes to originate a loan varies very little based on size.
The waiver seems to be working. At Feb. 28, the number of loans for $150,000 or less rose almost 9% from a year earlier, according to SBA data. Those loans have also made up 58% of all 7(a) loans approved this fiscal year, compared to 54% a year earlier.
"The fee waivers have been beneficial to community banks," says Ray Chiamulera, president of Radar Lender Services. "There has been increased demand."
Huntington Bancshares (HBAN) in Columbus, Ohio, has seen increased borrower for 7(a) loans, in part because of the fee waiver, says Craig Street, the $59.3 billion-asset company's head of SBA lending. Huntington never ignored smaller credits because "it isn't about a loan but rather about a relationship," he says, adding that smaller loans are "often an entry into that relationship."
The fee waiver has made 7(a) loans more attractive to Huntington's clients. "We've had good success over the last several years" with SBA loans, Street says. "Success breeds success. The better we've gotten to know the program, the more effectively we've been able to use it."
Paul Davis contributed reporting to this story.