It took the Small Business Administration a couple of tries, but banks and other lenders are starting to show more interest in making smaller, government-backed business loans.
SBA officials established the "Small Loan Advantage" program in February 2011, and its selling point then was that it would offer a streamlined application process to select lenders that committed to making loans of less than $250,000.
The response was tepid at best, in part because only a few hundred "preferred lenders" were eligible to use the program. So in June of last year, the SBA opened the program to all its lenders, further streamlined the application process and raised the maximum loan amount to $350,000.
The result: Through the first five months of this fiscal year, the SBA approved more loans under the program than it did in the previous two fiscal years combined. The agency is on pace to approve roughly 3,200 such loans this fiscal year, nearly quadruple its approvals for all of last fiscal year, SBA officials said this week.
The re-engineering of the Small Loan Advantage is part of the SBA's broad strategy to get more capital into the hands of smaller borrowers and encourage more small banks to use its loan programs.
Though the SBA reported record loan volume in fiscal years 2011 and 2012 — more than $30 billion each year in its two main programs — the average loan size has risen dramatically in recent years as lenders have concentrated on making larger, more profitable loans. For example, the agency approved 44,377 of its 7(a) loans with an average value of about $341,000 in fiscal year 2012. Five years earlier, it approved more than 99,600 loans with an average value of roughly $143,000.
"The larger loans have come back" since the end of the financial crisis, "but the smaller ones, the under $250,000, the under $100,000, haven't come back as fast," says SBA chief Karen Mills. One big reason: "It takes the same amount of time and expense to make a small [SBA] loan as it does a big loan," Mills says.
The SBA created the Small Loan Advantage program to remedy that problem and make more funds available to smaller firms that do not necessarily need such large loans. "When you have a bank in the program, you want them not to just make the $2 million loan, you want them to make the…$50,000 loan," says Mills, who has headed the agency since 2009 and plans to step down later this year.
Now that the kinks have been worked out, the program seems to be working as intended. The SBA approved more than the 1,300 in the first five months of this fiscal year, and loan amounts are averaging less than $144,000.
The program was also designed to "take costs out" of SBA lending so that small banks, credit unions and community development lenders would want to make more SBA loans, according to Mills.
Though thousands of small lenders participate in SBA programs, many might only make a handful of SBA loans each year. By contrast, JPMorgan Chase (JPM), Wells Fargo (WFC) and Huntington Bancshares (HBAN) originated more than 10,000 7(a) loans last year -- nearly 25% of all 7(a) loans made.
"There are almost 5,000 [lenders] that have SBA loans on their books, and we want to make it easier for those that only do one, two or three loans to do five or six or 10 a year," Mills says. "Once they get to 10 they are used to our processes and will do even more."
Anthony Wilkinson, the president and chief executive of the National Association of Government Guaranteed Lenders, says interest in SBA lending is at "an all-time high," due largely to Mills' efforts in reaching out to smaller lenders. He noted, for example, that when small banks complained that the Small Loan Advantage application process was still too cumbersome, the SBA responded by further streamlining it.
Small Loan Advantage 2.0, as it's called, eliminated nearly 100 pages of paperwork for lenders and borrowers and cut processing times by up to 60%, according to the SBA.
"They sat down and listened to what lenders' concerns were," Wilkinson says. "When you take away barriers to participation, lenders will use the program."