The SBA is overhauling its marquee loan program. Community banks are optimistic.

Mike McGinley is optimistic a raft of recent changes made by the Small Business Administration to its flagship 7(a) program will boost the number of loans going to small businesses.

“A lot of lenders will lean into smaller loans now that you can do it more efficiently,” said McGinley in an interview with The Playbook. “It’s a very attractive time to apply for an SBA loan.”

McGinley, head of small business banking at Wilmington, North Carolina-based Live Oak Bank — the largest SBA lender by dollar amount — has had a front-row seat to changes large and small over the past few years. The SBA, under the Biden administration, has pushed to reform and revamp core agency programs — not without some opposition at times from bankers and members of Congress concerned about the health of its longtime lending programs.

Some of those changes were high profile, including an SBA effort to expand the number of licenses it offered under its lending programs, ending a 40-year moratorium on issuing new Small Business Lending Company licenses. Others included doing away with the so-called franchise directory of approved franchises, streamlining affiliation and ownership requirements and others.

Other changes, while more subtle, were still high impact and part of the General Services Administration's changes to its standard operating procedure made in the fall. They included reducing the SBA’s so-called “guaranty fee” to 0% of the loan for loans less than $1 million, and just 0.55% of loans above that — up to $5 million — saving businesses thousands of dollars or more on fees that could range above 2% previously.

For loans under $500,000, lenders can now use their existing origination process to craft loans, rather than the SBA’s rules. There are also smaller streamlining efforts around documentation, and equity injections even allowing automated scoring for certain loans, which all serve to bring down the total time it takes to make an SBA loan, McGinley said.

“Now lenders are going to be working on a lot of technology solutions that are going to be more efficient and which can be used for larger loans,” he said. “It’s taken some time for lenders to digest the new (standard operating procedure) and come up with their own policies and procedures.”

Lenders adapt to SBA changes

Overall, the number of 7(a) loans approved by the SBA has fluctuated over the years, although it had been dwindling from a peak of 64,075 in loans through 2019, when it dropped to 51,908 loans.

In 2020, during the height of the pandemic, it dropped to 42,302 as other relief programs flooded the small-business space, but it has largely been on the upswing since, reaching 57,362 in fiscal year 2023.

The 7(a) program has also been reaching more underserved communities, including Black entrepreneurs and women business owners, according to the SBA.

Ken Bauer, chief lending officer at Phoenix-based OneAZ Credit Union, said March 27 the credit union would begin servicing and originating SBA 7(a) loans entirely in-house.

“The new SBA rules allow for more streamlined and flexible processes, which benefit both lenders and small businesses," Bauer said. "Coupled with our in-house servicing and origination, they allow OneAZ to serve businesses with the financing they need in a highly efficient manner."

Ian Norman, executive vice president and managing director for consumer and business banking at Miami Lakes, Florida-based BankUnited Inc., said more business owners are considering SBA loans, and the changes the SBA has made during the past year have simplified the process and made it more efficient for smaller banks.

“While doubling down may be too aggressive of a term, community banks can find ways to provide this product to their clients in a manner that complements their traditional suite of products,” Norman said. “The changes made to the SBA loan program open it up for smaller lenders to be able to offer more loans by allowing more flexibility and simplification of the underwriting process. This should make it easier for banks to leverage the program to offer the product to small businesses."

Stephen Keen, senior vice president for congressional relations at the Independent Community Bankers of America, said while the association was “cautiously optimistic” about most of the rules, the answer on whether they will bear out into more loans is more nuanced.

“I do think there are certain provisions that could help community banks and help spur small business lending,” Keen said. “But there are definitely concerns.”

He pointed to the expansion of SBLC licenses and said if the SBA lowered its standards on allowing new entrants, and those lenders ended up hurting the program or ended up requiring Congressional intervention to keep the program afloat from larger losses, it could damage the long-term health of the program.

Other items, such as removing the franchise directory of approved franchises, could lead to confusion, Keen said.

“I would describe it as a mixed bag. There are certainly aspects of it that could really be helpful,” he said.