SBA 7(a) Loans Drop 18%

The SBA's flagship 7(a) loan program sustains a dramatic drop in loan volume

by Jeremy Quittner

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Pep Montserrat

In April, Wendy Kobler was looking for $50,000 to expand her two-person, $250,000 Huntsville (Ala.) marketing and consulting company, Kobler Communications. She needed the money in time to enroll in classes for a coaching certification, so she applied for a Small Business Administration (SBA) Express Loan through Redstone Federal Credit Union.

The Express loan didn't live up to its name. Kobler was No. 19 on the list of would-be borrowers. The credit union's representative told her that thanks to a deluge of applicants, the backlog was one of the biggest he'd seen. Kobler was told she'd have to wait 10 days, not the 36 hours the credit union publicizes in its marketing materials. Kobler says the loan officer scrutinized three years' worth of her personal and business finances and asked a lot of questions about her net worth, including the value of her home. "The loan processor was looking at anything he felt could pay back the loan," she says.

Kobler's experience is no longer unusual—and she's one of the lucky ones who actually managed to get financing. Tightening credit markets, declining home values, and a bumpy economy have claimed a new casualty: the SBA 7(a) loan. The SBA backed about 40,000 of its flagship 7(a) loans in the quarter ended Mar. 31, down 18% from the same quarter in 2007.

Veterans and rural entrepreneurs have been particularly hard hit, with loans to those groups down 20%, and 27%, respectively. Express loans, a popular subset of 7(a) loans that are easier to originate but carry a lower government guarantee, are down 30%.

BANKS ARE BAILING

The drop in 7(a) loans concerns entrepreneurs, lenders, and industry experts who say the program is meant to kick in during an economic downturn. Other ominous signs include the departure of more than 368 banks from the 7(a) program since 2006 and new fees that decrease the program's profitability for lenders. "When economic times are tight, government-backed loans are supposed to fill the gap," said Senator John Kerry (D-Mass.), chairman of the Senate Committee on Small Business and Entrepreneurship, in a written statement.

Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders (NAGGL), a trade association representing banks that issue SBA-guaranteed loans, agrees. "We should be seeing more volume than we are today, and the SBA is not taking any action to facilitate other loan activity," he says. In addition to high fees, Wilkinson says decreasing property values have eliminated the home equity used either to start businesses or to collateralize loans, further contributing to the falloff in volume.

The SBA blames the decline on the poor economy, weakening demand from entrepreneurs, and a tepid secondary market facing bankers wishing to resell the loans. Eric Zarnikow, associate administrator for capital access at the SBA, says banks got lax in their lending, then began ratcheting up their credit quality requirements this fall, even as less creditworthy candidates began applying for loans. "When we talk to lenders they say they have plenty of money to lend and the marketplace is very competitive," he says.

The SBA's experience seems to be in line with the wider market for commercial loans. In the Federal Reserve's April Senior Loan Officer Opinion Survey on Bank Lending Practices, 55% of domestic banks reported tightening credit standards for commercial and industrial loans, up from 30% in January. About 15% of large banks reported weakening demand for commercial loans from small businesses over the same period. Meanwhile, delinquencies are rising: Nonperforming loans in the 7(a) portfolio have increased more than 50%, to 2.39% as of February, 2008.

Zarnikow says the steep decline in Express loans skewed results for the entire portfolio. Dollar volume for the 7(a) program fell only 9% in the second quarter. A pilot loan program called Community Express, meant to address the needs of rural low- and moderate-income business owners, may actually have helped 7(a) volume a tiny bit. Those loans, for a maximum of $250,000, each grew 37% to about 5,000 loans in the second quarter.