Bankers and borrowers are having to show patience with the Small Business Administration as the agency works through a growing backlog of applications for 504 loans.
Turnaround times that took less than a week prior to the pandemic can now drag out for weeks, lenders said. They said the SBA has its work cut out handling the Paycheck Protection Program — the agency has approved 1.9 million PPP loans totaling $140 billion since Jan. 11 — along with a spike in requests for 504 loans, which finance fixed assets such as real estate and machinery.
“The SBA has so much on its plate,” said Chris Hurn, chief executive of Fountainhead Commercial Capital in Lake Mary, Fla.
“There’s demand for 504, demand for 7(a),” Hurn added. “The SBA is also juggling forgiveness and a new round of lending for PPP. Something’s got to give. … I don’t see things getting better until PPP is in the rear-view mirror.”
Banks fund half of each 504 loan, with the rest covered by borrowers and certified development companies. Because of its complex formula, the SBA reviews and approves each loan — including 3,368 since the new fiscal year began on Oct. 1.
A need to review loans individually is contributing to some of the delays, lenders said.
Approvals that routinely took three business days can now take more than two weeks, said Barbara Morrison, founder and CEO of TMC Financing, an Oakland, Calif., certified development company that lends in Arizona, California and Nevada.
Other factors can create longer waits.
“If you send a file in and there are questions, the timing gets out of whack,” Morrison said.
The SBA did not immediately respond to a request for comment.
Activity in the 504 program has accelerated after a sluggish start to the 2021 fiscal year. Aggregate volume more than doubled between Dec. 4 and Feb. 19, to roughly $2.7 billion, according to the SBA. That volume is 12% ahead of the same period in fiscal 2020.
“Volume has never been this high,” Morrison said, adding that TMC had record loan volume in its fiscal fourth quarter that ended on Sept. 30.
“Then our first quarter was even busier,” she said.
Applications could surge in coming weeks, as soon as the SBA issues rules allowing borrowers to take out 504 loans to refinance government-guaranteed debt under 504. The previously forbidden option was authorized by the stimulus law Congress passed on Dec. 27.
The law allows for the creation of a 504 Express option that would let qualified lenders underwrite and approve loans of up to $500,000 in-house.
For now, lenders have had to spend more time managing borrowers’ expectations or redirecting them to other loan products.
TMC recently had a borrower on a time crunch opt to finance a project with a 7(a) loan that had less-favorable terms, Morrison said.
"We have heard that small businesses are losing out on properties because the sellers won’t give them enough time for SBA approval to close escrow," Morrison added.
“Obviously, the SBA is constrained right now,” said Tom Pretty, head of SBA lending at the $388 billion-asset TD Bank. “They’ve been doing a great job throughout all of this in many ways, but the processing time for 504 loans has slipped.”
The 7(a) program has been running smoother than 504 for several reasons, bankers said.
Banks are allowed to lend directly to borrowers under 7(a). The SBA has also delegated underwriting and approval authority to hundreds of participating lenders. And the program already has an Express product.
Adding a 504 Express product would address some of the existing bottlenecks.
“There are many CDCs where [loans of $500,000 or less] make up most of their volume,” Morrison said. “I’m really hoping those regulations come out soon."
