Access to Capital is Critical for Small Businesses. How SMBs can Navigate SBA's Lending Rules and Source New Solutions

Access to credit lines is critical to small businesses. With several recent changes to SBA lending standards, many businesses may be wondering what's changed and how it impacts their financials. Our panel will discuss the breadth of the changes to SBA's standard operating procedure, its impact on banks and the economy, how banks can respond and why SMBs may seek alternative funding options.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Mary Ellen Egan (00:08):
Good afternoon. I'm Ellen, senior director of strategy with American Bank. This is a very important topic, and obviously, we'll discuss access to SBA lending and then alternatives to SBA lending. So we'll start with...

Nuno Francisco (00:28):
Good afternoon. My name's Nuno Francisco. I'm with Citizens Bank, the market executive in business banking, leading our expansion markets in New Jersey, New York, Florida, DC, and California. Good afternoon.

Ravi Durbeej (00:41):
Good afternoon. My name is Ravi Durbeej. I am from our Minneapolis SBA division with US Bank. I do SBA lending for the entire Minnesota and the Dakotas. Glad to be here.

Maggie Ference (00:50):
Hello. I'm Maggie Ference. I'm the small business and SBA director at Huntington National Bank, based out of Columbus, Ohio. We're actually a national lender and one of the most active small business lenders in the nation.

Brian (01:03):
Hi. I'm Brian, work with president of FS. We're based out of Chicago.

Mary Ellen Egan (01:12):
So I want to start with just a few changes to SBA ruling. In fiscal year 2024, SBA supported 103,000 financings to small businesses, the highest level across SBA's core program since 2008, as well as 18,000 loans to households for disaster recovery. The agency also increased its annual capital impact to $56 billion, a 7% increase over fiscal year 2023. This year, the SBA tightened its lending rules, raising the minimum credit score from 155 to 165 and restored lender fees to the 7A programs. The loan threshold was lowered to $350,000 from $500,000, meaning more loans will require full underwriting. Maggie, I remember on our call, you had some comments about this. Do you want to start and say, what do these changes mean?

Maggie Ference (02:09):
Yeah. So let me start with what these changes mean, and frankly, what these changes don't mean. Anybody that hears where Mary Ellen kicked us off—that's a heck of a sentence. It sounds like the rug was just pulled out from underneath small business. But the reality is, all of us sitting on this platform today, we've been around this business for a long time. It's like a pendulum. It's like all things in politics and economic cycles; you see the pendulum swing from one side to the other. If you were following along from home before 2022 or 2023, the rule book looks nearly identical to where it is right this moment. As you've seen the changes swing back, this is really where it's important to interview your lender and spend time understanding what your options are.

(02:55):
We're going to spend a lot of time talking about that today. But for anybody that's been around the business for longer than two years, this isn't weird. It's not cruel or unusual. All we're doing is really going back to an expectation of making sure that we're doing what's right for the small business applicant more than anything else. Because if you're paying attention to the statistic shared with you, the last highest number of small business loans made was in 2008. Most of you remember what happened in 2009. Really what we're making sure is that we're not heading into another situation like that. There was a little bit of a "put the brakes on" to make sure we're doing the right thing for all the small business applicants involved, because we want to make sure that two years from now, those are loans that are still getting paid and businesses that are still open.

(03:38):
So we're going to talk a lot about that today.

Nuno Francisco (03:40):
Right. It's almost like a return to normalcy. When you think about the period of time over the last five to six years and all that the industry and business in general has gone through, it's almost, to Maggie's point, a way to come back to the way that things work. I think it's on us as lenders and financial services firms to have that dialogue with customers because clients will get the sticker shock from the news. It's on us to bring that back and land it in their lap.

Mary Ellen Egan (04:11):
Right. And Brian, have you noticed, have any of your small business clients asked about this or asked for additional guidance?

Brian (04:18):
Yes, there is some concern among our small business clients, although I agree with what's been said here. It hasn't changed our practice. These are rules that we always enforced; they're reasonable in our view. They're not unreasonable barriers that no business can clear. This is the type of thing that we've always done, but we are getting more inquiries about it because the press has not been positive. However, we have not changed what we're doing.

Mary Ellen Egan (04:41):
What are some of the things that are impacting lending and credit these days? We can talk tariffs, interest rates, whatever. What are you seeing, Ravi, with the US Bank customers?

Ravi Durbeej (04:50):
Especially as we go back, the rise of operational costs. Labor is one of them. One big one that we have seen—think about all these loans that were taken out in the early 20s where the prime rate was significantly lower than it is today. You fast forward to today and you're talking about a prime rate at 7.5 as of today. What happened to those loans? This gives us the opportunity to go in there as banks and advocates for our customers to help recapitalize and re-amortize those loans to offset some of those operational expenses. We have tariffs and labor expenses.

Nuno Francisco (05:32):
A couple of things jump out. We've spent a lot of time in recent months talking to our customers and putting out op-ed pieces from leadership. The topics that hit us most—one of them we talked about this morning—is the tariff piece. That certainly has everybody in awareness mode. Certainly tax policy; I think there's still a lot of discussion happening regarding the long-term impact. Then it's talent. I think the demand for talent in small business is greater than ever because folks are more fluid and more aware of how important it is to have talent be part of their firm. That even comes up when you think about permanent capital that folks need to have in their business.

(06:23):
Some of that vision we see in strategic planning is for talent.

Maggie Ference (06:30):
We're human; we all tend to go to a negative place first. What are the impacts of tariffs? What are the impacts of interest rates that have sustained longer than anyone thought? But one of the things on the more positive side that we've seen since COVID is really a transition in the way that small businesses are behaving. Think about the conversation over the last couple of days around digital adoption and AI. Think about the entire concept of drop-shipping, where people aren't actually maintaining a full inventory base anymore. All of those things that evolved as we came out of the COVID era have really revolutionized the small business space. So, while we talk about enduring higher interest rates and labor shortages, we also look at how you have evolved your business over the last couple of years.

(07:22):
How are you creating a small business plan that doesn't look anything like something we would've looked at in 2010 or 2015? With every door that closes, you've got all these other opportunities right around the corner as well.

Brian (07:36):
Right. We've had similar conversations with our clients. I agree with everything that's been said. To add to that, what we've talked about since the advent of real inflation is making sure you pass along those costs. Recognize what these costs are, including the costs of financing. In a 3% interest world, you may not pass that along, but in an 8% interest world, you better. The same goes for tariffs and labor. One of the key solutions is to make sure we're constantly talking to folks about recognizing those costs and not being shy about passing them along.

Mary Ellen Egan (08:10):
I don't know if it's too soon yet, but I'm wondering if you're already seeing any effect from the government shutdown. Maggie, your flight was four hours delayed?

Maggie Ference (08:27):
Lost a day of my life.

Mary Ellen Egan (08:28):
Right. Because people are not showing up as they're not getting paid, it's understandable why they're upset. Have any of your small business clients come to you and said, "This is really going to impact me," especially in areas like DC and Virginia?

Nuno Francisco (08:43):
And even folks in high-density areas where there's a lot of opportunity. It's important for us to keep an open dialogue with the customer: yes, the government is shut down, but banks, lenders, and credit unions are still taking requests. It's about how we position the program to ensure that negative connotation stays away. We educate customers and empower them to understand that we're still going to process your loan and underwrite it. Okay, perhaps we can't book it just yet, although I've heard some in the industry are looking at alternative ways to get to a closing on an SBA transaction. It's just about walking the customers through and setting appropriate expectations.

Ravi Durbeej (09:41):
Right. We can control what we can control. We can control taking applications, underwriting, and working through conditions. Those are things we need to portray to our customers. We want to maintain a positive attitude and process as many loans as possible. When the government does reopen, we're in the best position to pull those numbers and close as fast as we can.

Maggie Ference (10:10):
It's a sad reality that over the last decade, the concept of a government shutdown has almost become too regular. Every couple of months, you see a headline that the government could shut down. For most of us, we prepare for that and take it in stride. We make sure we can be open for four to six weeks generally. In the meantime, the reality is it takes 30 to 60 days for the average business loan to close. If you're making an application today, I would like to think that 60 days from now, the federal government will be open and we'll be ready to process that deal. This is the second-longest run we've ever had, but having been in the industry when the longest shutdown occurred, small business loans were getting done during that time too.

(10:56):
It's important to steal the commentary back from the headlines and lean into what the small business needs right now.

Brian (11:05):
Yeah, that is the message. We're still in business and progress is being made. We want to make sure no one is discouraged. There are skeleton crews within the SBA, and there's things that delegated lenders can do to keep the process moving along. We encourage everybody to focus on that.

Mary Ellen Egan (11:22):
Let's talk a little bit about alternatives to SBA lending. Private equity, or other things you're seeing in the industry? I read in the New York Times about a company that borrowed a lot from private equity and then went belly up. Do you get asked for advice about where else to look besides the SBA or your bank?

Nuno Francisco (11:55):
This one is very close to my heart. In my opinion, as an industry, we have to do a far better job of educating our bankers on exactly what the SBA program is. Oftentimes, the SBA becomes almost like a second look at a credit or a counteroffer. If we equip our teams with proper education and a good understanding of the SOP, we can look customers in the eye and present multiple solutions, whether it's 7A, 504, etc. Step two, we need to focus on community—EDCs and CDCs. What are we doing to partner with those folks?

(12:59):
A lot of them have micro-loan programs. Some are supported through municipalities to provide access to grants and forgivable loans. You have the network of CDFIs. I haven't heard that enough this week. I think that's something we can leverage to provide access to capital outside of the traditional lens of credit. We all know how it is when somebody's starting a business and perhaps doesn't have that "magical" FICO score or inventory. There are some really sound alternatives that aren't going to charge you 30% interest.

Ravi Durbeej (14:03):
Yeah. It comes back to knowing your customer. I like that SBA is not a "second option." It irks me when I'm coming into a conversation and they've already gone through a process. You also need to talk with your customer to understand all the solutions you offer within your bank as well. At US Bank, we offer many alternatives to SBA. If a client needs a piece of equipment, SBA might not be the right solution at that point.

(14:51):
We have an equipment financing group and small loans we can do in-house. Look internally as well, because you do not want to set that business up for failure in the long term for a short-term goal.

Maggie Ference (15:11):
When we talk about access to capital, my bottom line is that all capital has costs. Whether it's a HELOC, a credit card, borrowing from "great aunt Sally," or a venture capital loan—everything has a cost. Sometimes it's 30%; sometimes it's great aunt Sally asking at Thanksgiving why you got new shoes if she hasn't been paid back yet. Really make sure you're analyzing what the cost is to your business to take on this debt. The other thing is the general education around access to capital anyway.

(15:57):
If you sit down with an average small business and ask what they need, they almost always ask for a $100,000 line of credit.

Nuno Francisco (16:07):
Yeah, it's either 100 or a million.

Maggie Ference (16:08):
It's 100 or a million. Nothing in between, and always a line of credit. It's like, you're buying real estate or a pizza oven; why are we getting a line of credit? It's making sure you're getting them into the right vehicle matched with the asset. Then making sure that cash flow and debt service don't mismatch. The most successful customers are the ones that sit down and plan. Sometimes we say "no" or "not yet," and those are some of the best conversations I've had with lifelong customers.

Brian (16:50):
Yeah. We don't view the SBA as a lender of last resort. There are multiple other lenders out there, especially for businesses that may not yet be commercial bank-ready. We work with SBDCs and economic development groups. One thing I'd add would be revolving loan funds. These are entities whose express purpose is to promote growth in the area. As for private equity, we'd work with them as well. We don't see a lot of them lending to small businesses; they'd rather acquire them.

(17:30):
We have seen more of them with an appetite for a minority interest. That's a capital raise, which is every bit as valuable, if not more expensive, than what we do. Angel investors are another avenue.

Maggie Ference (17:48):
To get their money back.

Brian (17:49):
Absolutely. You have to understand it's a real business transaction. But for businesses that aren't yet bank-ready, it should be considered.

Mary Ellen Egan (18:00):
I'm the chief lender in my family, so tell my brothers they better start paying me back! Maybe you want to talk about the importance of financial education for small business owners at any stage. Needs change as they mature. We discussed helping to consolidate small business debt—how important is it to keep educating them along all their life stages?

Maggie Ference (18:33):
Absolutely. There are a thousand industry codes, but only one really aligns with owning a business and understanding how it works, and that's accounting. Everybody else is really good at something that doesn't include the actual running of a small business. When you ask a kid what their favorite subject is, if they say gym class, they're probably going to be a small business owner. If they say math, they're probably going to be an accountant. Outside of a propensity to run your books, the average owner is good at a service or a product, but not financially driven.

(19:15):
That's where we come in. They don't have a CFO or a board of directors. They talk to their accountant every spring, and it's probably the same guy doing the taxes for everyone else. With financial education, we're just trying to have a conversation on how we can help you run the aspects of your business that you're not passionate about—the stuff you're doing Friday night at 10:00 PM and hating. It's about building that acumen so you can look around the corner and not just live through the day.

Ravi Durbeej (20:18):
I'm a small business banking officer for US Bank, but I like to say I'm a trusted advisor. You have to be that for your small business in today's environment. I've got calls on Friday afternoons; they know to call Ravi. "Hey Ravi, this is happening, what is your input?" That warms my heart. Business owners don't want to talk about P&Ls or balance sheets; they want to talk about their business. Being that trusted advisor is key.

Brian (21:13):
Part of the education component that's easy for us is education on the products and tools available. Business owners do not always know these things. Most small businesses don't have specialized accounting or law firms, so their banker needs to be the one to bring the proper loan structure and disciplines that help them grow.

Nuno Francisco (21:51):
Education is a three-pronged approach. First is the upfront education—small business workshops in branches or working with local CDFIs. The second piece is what financial education looks like when they have debt on their books on the back end of the business lifecycle. Perhaps there's a wealth event because they're liquidating or selling. Working internally with workout or wealth groups for tax planning is a big opportunity.

(22:40):
The third piece is the education that the client-facing teams bring to clients every day. I want my folks to have the relationship where they're getting invited to their customers' summer barbecues. If we can get there, we have really good dialogue and the ability to educate our customers every time we chat.

Mary Ellen Egan (23:34):
That's interesting. I never thought about bringing in other departments. Do you all do that as well?

Brian (23:43):
Done properly, it's not selling; it is advising. That's a comfortable way to assist a client you care about. They don't know which department or expertise we have, so it's a critical part of building a relationship that can be sustained through cycles.

Ravi Durbeej (24:08):
We have a team environment. For example, I went to meetings where we brought a merchant services person. Today, how do you save a business on credit card merchant processing? We bring the team to the customer. We are here to help you grow and obtain your goals, whether that be through SBA, merchant processing, or any ancillary product. It all goes back to the cash flow.

Maggie Ference (24:51):
We refer to them as "natural fit partners." When you're looking at business needs, what else can we do to help? We believe the cost of some of these products should be built in. Take fraud protection—60% of small businesses will have a fraud event in 2025. Many won't even know it. Some will have a large event that puts them out of business because a manager clicked a button in a payroll scam.

(25:40):
If they had paid $10.50 a month for fraud protection, that ship wouldn't have sailed. Consolidation of debt is another huge opportunity. People come in asking for a $100,000 line of credit, and we say, "No, we're going to consolidate your balance sheet and save you 15 grand a month." SBA is a great vehicle for that.

Mary Ellen Egan (26:42):
That was a terrifying stat—60% of small businesses.

Nuno Francisco (26:47):
It's not a matter of if; it's a matter of when.

Mary Ellen Egan (26:50):
So how are you helping to combat fraud?

Nuno Francisco (27:00):
We pivoted earlier this year in how we deliver service. We're doubling down on talent. We looked at the best customers in the bank and "ring-fenced" them. I lead the $1 million to $50 million space. We uncovered a need to put "checks in the seats" to support customers at the level of service we want to deliver.

(27:58):
Every RM has a service team dedicated to supporting clients on fraud and servicing. We have RMs in expansion markets like Florida and California where we have little to no branch visibility. The RMs are the center point and the face of the bank for our clients.

Maggie Ference (29:40):
We actually stood up a fraud team. One of the biggest things our RMs struggled with was what to say in the moment someone calls with a problem. You can tell people to take the Post-it note with their login information off the wall—everyone has one—but something will still happen. We have a fraud team; the moment you get that call, you patch in "SEAL Team Six."

(30:21):
Those moments are critical, like a house burning down. If you get the fire department there quickly, you can save the structure. We have a 1-800 fraud team to stop the bleeding and recover funds. It's about staying ahead of the newest payroll or text scams.

Ravi Durbeej (30:51):
Again, the team environment. We have treasury management individuals dedicated to clients. If you see a business owner writing checks, you want to introduce them to the treasury management team. We also have a fraud team actively monitoring. It goes back to education.

Brian (31:49):
We focus on education. First, that recovery is possible but not probable, so let us know quickly. We use social media and newsletters to inform people of the recurring types of fraud we're seeing. We hope that repeating the message gets through to someone who might otherwise click on a link.

Mary Ellen Egan (32:37):
We have a few minutes for questions. You're not a very curious crowd! Every panel has answered every question. So, I'll end with a lightning talk: What keeps you up at night?

Nuno Francisco (32:57):
The market's really hot right now, and the shutdown. I'd like to see it come to an end before it gets more legs in the press.

Ravi Durbeej (33:20):
I just had a newborn, so I'm not sleeping at all! But definitely the government shutdown. We want to be out there helping our small businesses. Also, understanding what's happening in the future with the economy.

Mary Ellen Egan (33:47):
And you can't control a newborn.

Maggie Ference (33:53):
I have teenagers; they keep you up all night too. Besides the shutdown, there's so much opportunity with AI and digital adoption. Information can be dangerous and predatory. I want to make sure we're meeting small businesses on Main Street where they need human interaction.

(35:01):
There's nothing I hate more than seeing someone sign up for a 24% rate at 2:00 AM. It's the "death of a small business" when they are afraid to raise their hand for help. What keeps me up is how we digitize trust and guidance to be more available.

Brian (35:23):
The same thing worries me: finding the right staffing. As a longtime banker, I don't necessarily have the skillset to navigate these new waters, and some of our young people don't either. We're trying to find, train, and retain the right personnel to help us adapt to this new world.