Trends in SBA Lending: Product Reviews by Eighth District Bankers
In July 2010, the Community Development staff of the St. Louis Fed conducted telephone interviews to survey financial institutions of various sizes across the Eighth Federal Reserve District about their experiences with lending products initiated by the Small Business Administration (SBA). The results of this informal survey demonstrated that in this difficult environment for lending to businesses, the SBA is providing critical access to credit. Following are some of the specific results of that survey.
State of SBA Lending
For much of the Eighth District, SBA loan originations have been steady. Most of the surveyed institutions reported that there have been no significant decreases or increases in the number of SBA loans in the last couple of years, and none are anticipated through 2010. The institutions noted that SBA loans are most often used for expansion and refinancing, although some markets are seeing a demand for loans from start-up entrepreneurs. Some banks viewed the economic downturn as an opportunity to market SBA loans. The survey acknowledged that two major changes in SBA guidelines were key factors in helping Eighth District financial institutions maintain healthy loan volumes. The major changes included: 1) SBA borrower fees being temporarily eliminated and 2) the SBA guaranteeing up to 90 percent of loan amounts. Financial institutions indicated that these changes ensured that the SBA loans were a good deal for both banks and borrowers alike.
SBA loan demand varies according to the type, size and age of the business seeking the loan, as well as by region within the Eighth District. Areas exist where demand for new loans has been low, largely due to the economic market of communities within those areas. In some markets, business owners are unwilling to take on additional debt through loans due to conditions presented by an unstable economy. Institutions in Kentucky, however, note that SBA lending in their state has outpaced the rest of the nation. As of May 2010, Kentucky surpassed its 2009 SBA lending totals, with lending increased by a whopping 217 percent. The survey indicated that the upswing in Kentucky’s SBA lending is a result of a greater number of banks taking advantage of the guarantees offered through SBA’s loan programs.
Review of SBA Products
7(a) Loan Program: Survey findings indicate that banks across the Eighth District use the SBA Express loans within the 7(a) loan program. SBA Express loans require minimal work to originate and feature low documentation requirements. Bankers noted and appreciated the streamlined process of the SBA Express loans. Financial institutions specified that the SBA Express loans are a good match between the needs of the lenders and smaller businesses requiring small-dollar loans. The Rural Advantage and Community Express loans, also a part of the 7(a) loan program, are not highly used by the financial institutions that were surveyed.
504 Loan Program: Financial institutions utilizing the 504 loan program explained that the loan program works well in their markets and that that the program has created an effective product for borrowers. Institutions value the partnerships with local community development corporations (CDCs) to originate these loans. The 504 program has significant volume in debt refinance of commercial real estate (CRE), often allowing permanent construction financing of CRE that otherwise would not be possible without the SBA. The survey revealed that the stress in commercial real estate can be mitigated with the 504 loan program, as some bankers explained that long-term fixed rate financing, which is critical for economic development, would not be possible without it. In some areas of the Eighth District, few 504 loans are completed on a regular basis due to what is perceived by bankers as an intensive application process. Several small banks specifically indicated that they do not have the staff support to dedicate to the completion and monitoring of 504 loans.
Microloan Program: Financial institutions across the Eighth District are reportedly using the SBA’s microloans of up to $35,000 to appropriately boost working capital for small businesses. No challenges or issues with the microloan process were identified by financial institutions.
America’s Recovery Capital Program: Bankers lauded the intent of this program, which allows for loans up to $35,000 with a 100 percent guarantee for small businesses that have taken a major hit due to the economy (for example, those that have noted a 20 percent reduction in sales or a reduction in employees). Financial institutions tend to underuse the program, according to the survey, and would value a more streamlined process for the loans.
Recommendations for Enhancements
While the Fed’s survey indicated that District bankers are generally satisfied with SBA lending products and services, it also identified the following opportunities for improving future opportunities for lenders and borrowers alike: 1) automate billing statements, reports and accounts for borrowers; 2) hold frequent education and training sessions for community bankers on SBA products and services; 3) assign lenders to regional SBA processing offices, which would help the SBA processors and commercial bankers to build working relationships; and 4) when possible, streamline the lending process.