The small business administration has temporarily suspended fees to guarantee 7(a) loans of $150,000 or less, answering criticism that the agency's focus on supporting larger loans left the tiniest would-be borrowers starved for credit.
Since the recession, large loans have rebounded faster than smaller ones. About half as many of the smaller loans were made last fiscal year as in 2008.
"We know those smaller loans are the ones that go to the smallest businesses, startups and underserved areas," says Jean Hulit, the SBA's acting administrator. "We wanted to make sure that area is getting some attention."
The fee waiver took effect Oct. 1 and lasts one year. In addition to the fees that lenders typically pay based on the amount guaranteed by the government, the ongoing monthly fee paid by SBA lenders will be eliminated for the entire life of 7(a) loans of $150,000 or less made during the current fiscal year.
The fees collected on larger loans will offset any losses sustained from the smaller ones, says Hulit, who notes it was important to implement the fee waiver "in a budget-neutral way."
Through its two main programs, 7(a) and 504, the SBA backed almost $30 billion of loans to small businesses in the year ended Sept. 30, down about 2 percent from fiscal 2012.
Interest in SBA loans soared two years ago after the agency temporarily eliminated fees on all loans and raised the guarantee limit. The new waiver on the smallest loans is an opportunity for banks to reach out to customers about a chance to secure financing at a lower cost, says Rick Wall, CEO of the $429 million-asset Highland Bank in St. Michael, Minn.
"This is another tool in [a lender's] belt that is less expensive now," says Wall, who notes that about a third of the bank's SBA loans are less than $150,000. "Our lending pipelines are more full than they have been in the last five years. ... Some people feel like they have waited long enough to do something, and now they want try to expand their businesses."
One reason for the slow volume on small loans: it can take almost as much time to originate a $125,000 SBA loan as it does for those greater than $1 million, and banks make more money on the larger credit, says Ray Chiamulera, president of Radar Lender Services, an advisory firm.
Eliminating fees is part of a broader initiative to make it more cost effective to originate smaller loans, Hulit says. For example, the agency's streamlined approval process for loans that are less than $350,000 will be expanded to all 7(a) loans.