Why Do So Many Financial Institutions Avoid SBA Lending?
SBA Lending Can Be a Hidden Gem for Some Institutions
Loans guaranteed by the U.S. Small Business Administration represent an underutilized growth engine for financial institutions. With proper planning and the utilization of technology, SBA lending can boost customer acquisitions and deposits. It can also drive other areas of business banking while providing meaningful solutions to customers. Sounds great, right? So why are only 15.4 percent of all financial institutions in the U.S. active SBA lenders? How can we get more participation from banks and credit unions across the country? Many argue that SBA lending is complicated, and while that’s true, it’s actually a good thing.
The rules of the SBA program may be difficult to learn and complex at times, but they’re also a key reason for its success, says Jeff Roegge, an SBA lending professional. Today, the SBA would be considered one of the top 10 financial institutions in the U.S. Roegge is a big proponent of SBA lending, as well as a big proponent of complexity. Why? “The day that the SBA makes its program simple, expect twice as much competition and half the profitability,” Roegge said in a recent whitepaper, SBA Lending: An Overlooked Growth Engine.
Because of the complexity, length of time, and costs involved with SBA lending, many financial institutions shy away from. In fact, according to the SBA, only 15.4 percent of all financial institutions in the U.S. are active SBA lenders. Over the past five years, the number of active SBA lenders has decreased from 2,344 financial institutions to 1,811 institutions – a decrease of 22.7 percent. While participation in SBA lending dwindles, SBA loans are thriving. In the same time span, SBA loans have increased 30 percent from 46,000 to 60,000 and the approved dollar amount has increased 42 percent, from $17.8 billion to $25.3 billion. While SBA lending may not have previously been a viable opportunity for some financial institutions in the past, there is significant opportunity in SBA lending for institutions looking for new growth, new deposits, or a new way to serve existing customers.
How to get started
SBA lending rewards financial institutions that are prudent. “Start slow, lean on experts, develop a cadence, practice fundamentals, and progressively get better and faster over time, not overnight,” Roegge advises. The first step that Roegge suggests taking is to contact the SBA Lender Relations Specialist in your institution’s market and propose a meeting. This specialist will likely visit your financial institution, and then provide an outline of next steps, as well as additional resources and contacts to help get the institution started.
If you’re worried that you’ll have to take on additional staff to support SBA lending, don’t fret. The second component of a successful SBA lending experience, according to Roegge, is having an “SBA Champion.” And institution only needs one individual to be committed to the SOP, the SBA’s Standard Operating Procedures, as well as originating, underwriting and processing an SBA 7(a) loan. “You do not need an entire staff to start off with as long as you have a sales-driven SBA office to help you and also to coach your bank on servicing the loan after it closes,” said Roegge. Over the years, the SBA has taken many measures to help overcome the learning curve to increase participation and strengthen the program. From Community Advantage to the National Association of Government Guaranteed Lenders (NAGGL), there are many programs in place to make SBA lending work for your financial institution.
A final feature available to institutions today is technology. “It is companies that are developing SBA tailored processing software that is beginning to give the smaller lenders a level playing field,” said Roegge. “While the SBA itself will never become a contender in the fintech space, there is a wide landscape of open architecture out there to integrate with the SBA.” Financial institutions can leverage SBA lending technology to help customize and streamline the underwriting and decisioning process for SBA loan application, as well as integrate FRANdata technology, which transfers all franchisor data and eliminates hours of research into franchisees or gambling on the performance of the franchise. Today’s technology enables management to have greater visibility across the portfolio and helping the SBA team to make smarter, faster decisions.
SBA lending certainly comes with its fair share of challenges and complexities, but it is also what makes it a strong and successful program. SBA lending can help spark new opportunities to generate loan growth, create a competitive advantage in the market, or create new offerings for existing customers. While it’s not always easy, there are many more resources available today to level the playing field for smaller financial institutions, making SBA lending profitable, efficient, and successful.