For more than a decade, my team and I have provided small business loans and merchant advances to thousands of main street businesses across America. As co-founder and CEO of ForwardLine, I’m frequently asked why SBA loans aren’t more common on Main Street.
The answer, in my opinion, is that SBA loans are, in many ways, not a good fit for either the SBA lender or the main street business owner.
As a result, there’s a supply and demand problem. In this post, I’ll just discuss SBA lender reluctance- the supply side. In a later post, I’ll talk about the demand side- why main street business owner are skeptical of SBA loans.
Regarding SBA lender reluctance, for lack of a better term, I’ve found that many banks provide SBA loans more out of a sense of obligation rather than enthusiasm. SBA loans are paperwork intensive (a hassle for both borrower and lender) and can involve significant delay in waiting for SBA review and approval. Meanwhile, approval can be hard to obtain. Lots of applicants are discouraged from even applying, as many lenders thoroughly screen would-be borrowers to avoid wasting time on applications with anything other than a very high probability of approval. Even the process of a lender calling on the SBA guaranty for bad loans is complex and results in frequent denials.
So, should it really surprise us that Bank of America funded only 40 SBA 7(a) loans in Q1 of this year? No, that’s not a typo, it’s 40, not 400, not 4,000. Meanwhile ForwardLine, with a loan portfolio that would barely be a rounding error on the B of A balance sheet, funds hundreds of small business loans every month.
There is another component to SBA lender reluctance when it comes to main street businesses. The loan sizes that main street businesses are seeking are just too small for the SBA lender to justify cranking up the time-consuming SBA application process. As a result, many SBA lenders have “house minimums”, meaning minimum SBA loan sizes that they will accept. These minimums are typically $150,000 or higher. In contrast, at ForwardLine, our average loan size is about $30,000.
Is the SBA OK with this? They appear to be. In fact, the SBA makes it all possible by defining “small business” broadly enough to include “big” businesses, certainly businesses that are bigger than main street businesses. For example, according to the SBA, a restaurant can have $7MM in annual revenues and still be considered “small.” That’s more than 17 times the restaurant industry average! In fact, 95% of all U.S. businesses have annual revenues of less than $2MM. And I estimate that 99% of main street businesses in the U.S. have annual revenues of less than $2MM.
So, on the supply side, the bottom line is that SBA lenders can’t seem to make the economics of the SBA loan process work for the smaller credit needs of main street businesses.
Stay tuned for my future post regarding the demand side.