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Banking & Finance

SBA Eases Smaller Loan Access

By Jenny Callison, posted Feb 2, 2024
The U.S. Small Business Administration is touting its success in expanding opportunities to a more diverse array of borrowers during the federal fiscal year that ended Sept. 30.

“Highlights of the SBA’s FY23 lending include a notable increase in the number and value of 7(a) loans to small businesses across America, as well as a rise in the number of small-dollar loans distributed through this essential program,” a recent news release from the SBA stated. “The SBA also made strides in its ongoing efforts to close persistent gaps in capital, particularly for entrepreneurs from underserved communities.”

Live Oak Bank, the nation’s largest SBA lender for the past six years, is applauding, judging by comments that chairman and CEO James “Chip” Mahan made during Live Oak Bancshares’ fourth quarter 2023 earnings call Jan. 25.

“We have recently attended two meetings at the White House to understand some very significant changes that have been put in place to give access to capital to smaller businesses and many in potentially underserved areas,” he said during the call. “Historically, the SBA had its banks charge an origination fee and a 55-basis-point trail on each loan to fund the program. Under the revised plan, the origination fees on all loans under $1 million have been eliminated. And on loans under $500,000, all collateral requirements have been waived.”

Mahan mentioned several revisions to the 7(a) program, including allowing lenders to use their own underwriting standards, the same ones they apply for non-SBA loans. Another change: For loans under $150,000, the government guarantee has increased from 75% to 85%. The SBA has simplified the underwriting requirements for loan applications for less than $500,000. Collateral requirements have also been reduced.

In the earnings call, Live Oak President B.J. Losch said the bank is working on “new products, like technology solutions,” which will make it easier to make smaller-dollar 7(a) loans.

Mahan sees a broader lending landscape for Live Oak as a result. Referring to the SBA’s revisions as “a tectonic change” – one his team did not expect – he anticipates that Live Oak will assess its strategies carefully. But he emphasized the positive impact he believes the new guidance will have.

“Traditionally, we would say that our target market would be those businesses with revenues between $500,000 and $10 million. In that group, in 2023, there were 1.5 million such businesses in the United States,” he said.

He then noted that there are 5.3 million businesses that generate between $100,000 and $500,000 in annual revenues. The SBA’s streamlined regulations and requirements now make those businesses attractive potential borrowers.

“As the agency’s number-one lender, Live Oak’s average loan over the past six years has been about $1.5 million. This will change,” he said. “We are extremely excited about these changes that will enable us to put capital in the hands of deserving businesses that we have not addressed in the past. And the fact that we can reach down to some of the underserved communities and take care of them, the ones that are deserving and have good historic credit quality – I mean, it's a huge difference.”
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