When I met recently with the new Administrator of the Small Business Administration (SBA), Maria Contreras-Sweet, I was impressed with how many issues we have in common:
- We’re both working to increase business lending and reach underserved borrowers;
- We both oversee programs to ensure that business loans are made in a safe and sound manner; and
- We both believe SBA-guaranteed loans can be a strong book of business for credit unions.
As a result of our initial meeting, we initiated a series of follow-up meetings leading to a formal partnership between NCUA and SBA. In the coming months, NCUA plans to co-host a joint webinar with SBA, provide additional examiner training on SBA programs, and release updated guidance to examiners and credit unions.
So I am dedicating this article to the many benefits for credit unions making SBA-guaranteed loans.
Earning Expanded Guarantees
SBA-guaranteed loans are designed to provide credit to business owners who might not qualify for standard business loans. To compensate for the risk, SBA guarantees a significant portion of each loan with the backing of the full faith and credit of the United States.
In recent years, SBA has expanded its guarantees. Federal backing now ranges from 50% up to 90% of the loan principal, depending on the loan type. As a result, SBA-guaranteed loans—when managed effectively—rank among credit unions’ safest loans.
Preserving Cap Space
The guaranteed portions of SBA-backed loans do not count against credit unions’ statutory cap on member business lending (MBL). So for example, a $100,000 loan with a 50% guarantee by SBA would only count as a $50,000 loan for purposes of the MBL cap.
Growing Loan Volume
In the past two-and-a-half years, both the average size and the total dollar amount of SBA-guaranteed loans at credit unions have grown by nearly 50%. The average size has increased from $101,000 to $147,000. The outstanding dollar amount has risen from $800 million to nearly $1.2 billion.
However, SBA-guaranteed loans at credit unions still tend to be smaller than other member business loans, which average $225,000 per loan and total $48.8 billion.
Serving a Unique Niche
SBA-guaranteed loans made by credit unions provide needed capital to start-ups and small businesses that may initially find it difficult to borrow from other institutions.
In fact, SBA’s study titled, The Increasing Importance of Credit Unions in Small Business Lending, suggests that most credit union member business loans do not simply take the place of commercial loans that banks would have made. Empirical results demonstrate that each $100,000 of new member business lending by credit unions can generate an additional $81,000 from other sources of credit for small businesses.
Unlocking Credit Unions’ Capacity
Yet there is still tremendous untapped capacity for credit unions to make more SBA-guaranteed loans. Of the 2,250 credit unions offering member business loans, only 367 have any outstanding SBA-guaranteed loans.
Streamlining Loan Processing
Historically, some credit unions have had difficulty handling the manual approval process and extensive documentation required to originate SBA-guaranteed loans.
SBA is actively working to resolve this issue. SBA is developing a new lending platform that will automate the approval and documentation of SBA-guaranteed loans.
SBA plans to roll out the new platform (to be called “SBA One”) during the first quarter of 2015. The automated platform will facilitate approval and processing of SBA 7(a) loans. This will cover the vast majority of credit union loans backed by SBA.
SBA is also updating its underwriting criteria. Combining personal credit scores with business credit scores will allow more small business owners to qualify for SBA-guaranteed loans.
Small business loans create jobs, enrich communities, and develop loyal credit union members. For all of these reasons, there has never been a better time to consider making SBA-guaranteed loans.