National Small Business Week is a reminder of the importance of the 30 million small businesses in the U.S., but it’s also a good time to consider the opportunities that these entrepreneurs and growth engines of the economy offer to SBA lenders.
Certainly, fintech companies recognize the opportunity. Among the top 25 most active SBA lenders in 2018, two have theirs roots in financial technology.
Traditional banks and credit unions, too, can seize loan and earnings growth opportunities available in SBA lending – especially if they utilize SBA lending technology themselves to streamline the process for both the institution and the borrower.
Bob Coleman, editor of the Coleman Report newsletter and an expert on SBA lending, provided an overview of the Small Business Administration’s loan-guarantee programs during a recent webinar, “What SBA Lenders Need to Know in 2019.” Coleman will lead a panel of experts to discuss opportunities in SBA lending, including secondary markets and low costs.
Interestingly, many financial institutions already consider themselves SBA lenders. A survey last year of more than 500 banks by the Conference of State Bank Supervisors (CSBS) and state regulatory authorities found that nearly 70 percent of community banks reported offering SBA loans. Only 1 in every 4 banks surveyed said they didn’t offer SBA lending and have no plans to offer it in the next 12 months, according to the survey report, Community Banking in the 21st Century 2018.
However, there’s evidence from the U.S. Small Business Administration (SBA) itself that many of the banks offering SBA loans are focusing very little attention on the offering, based on the number of loans they are booking. Indeed, most banks that provided 7(a) loans, the most common type of SBA loan, through the first nine months of 2018 weren’t active lenders, according to SBA statistics for the first nine months of 2018. Of more than 1,800 7(a) lenders, almost half completed fewer than five SBA loans.
It’s not surprising to many banking professionals that most financial institutions shy away from SBA lending. After all, the government-backed lending program is document- and data-entry intensive. The rules for participating are voluminous and require a certain expertise. The application is also likely to require a different template from the bank or credit union’s typical commercial loan or member business loan application. The SBA forms often require repeated data entry by both the borrower and the financial institution before the loan can go through underwriting and before loan guaranty packages and loan servicing request packages can be forwarded to the SBA through E-Tran for final approval.
Faster, profitable SBA loans
When financial institutions are interested in immediately selling SBA loans to the secondary market, volume is key to a successful SBA lending program. The faster the institution can accept an application, get it through underwriting, close the loan and sell it, the more profitable the business is for the institution, so delays tied to re-keying data and switching from one lending solution to another are costly.
All of these issues can make SBA lending time-consuming, frustrating and inefficient for a lender already looking for ways to streamline processes in the face of high regulatory costs and margin pressures from low interest rates.
Nevertheless, the opportunity is appealing to some lenders. Aside from fintechs themselves that have evolved into or had executives leave to develop SBA lenders, numerous financial institutions have doubled-down on SBA lending in recent years by focusing on technology to make the process more efficient and boost volume. These banks and credit unions understand that fintech is a wave that they can ride or a wave that risks wiping them out.
Financial institutions can either look at fintech as a competitor or a partner when it comes to SBA lending. Technology that streamlines the application and underwriting process, while tailoring it to the SBA’s specific policies and procedures and the institution’s own practices, can actually make SBA lending a growth avenue where risk is mitigated by the U.S. government’s backing. Financial institutions that implement technology and internal processes to tap into this underutilized avenue for loan growth can also benefit because their checking customers may not be tempted to move to a non-bank lender, which might eventually also lure away those customers’ deposits.
Finally, financial institutions that bolster their SBA lending can take pride in contributing to growing local communities by providing the capital that helps small businesses grow. After all, small businesses comprise 99.7 percent of all firms with paid employees, 97.6 percent of all firms that export, and they accounted for two-thirds of net new job creation between 2000 and 2017. Lending to small businesses through the SBA in some cases can also help financial institutions satisfy Community Reinvestment Act requirements.
Small businesses represent opportunities for financial institutions to grow and to retain customers. Technology that streamlines the application and underwriting of SBA loans can help financial institutions grow lending to small businesses while mitigating risk.
To learn more about the opportunities of SBA lending, listen to the on-demand webinar, "What SBA Lenders Need to Know in 2019"