Banks Welcome Fee Waiver on SBA Loans
October 31, 2013
The Small Business Administration is suspending fees on its smallest loans in an effort to spur more lending to startups and other companies banks see as risky.
Larger loans backed by the SBA have rebounded from the recession faster than smaller credits, says Jeanne Hulit, the acting administrator of the SBA. The agency is eliminating fees on 7(a) loans that are $150,000 or less as a result. The change took effect Oct. 1 and lasts one year.
“We know those smaller loans are the ones that go to the smallest businesses, startups and underserved areas,” Hulit says. “We wanted to make sure that area is getting some attention.”
The SBA has had three consecutive years of robust loan demand, but half as many of the smallest loans were made last fiscal year as in 2008, Hulit says. Overall those credits make up about 55% of SBA-backed loans.
SBA loans are assessed a guarantee fee based on the dollar amount covered and other factors. For example, a $150,000 loan usually receives an 85% guaranty and is charged a 2% fee, or $2,550. The lender pays the fee and then typically passes it on to the borrower at closing. Additionally, there is an ongoing monthly fee for SBA lenders. It will be eliminated for the entire life of loans made during the current fiscal year.
The SBA is able to do this because the fees it collects on larger loans will offset any losses it sustains from these smaller ones, says Hulit, who notes it was important to implement this “change in a budget neutral way.”
The SBA reported on Oct. 29 that it backed almost $30 billion of loans to small businesses through its two main programs, 7(a) and 504, in fiscal year 2013, which ended Sept. 30. That was down about 2% from fiscal year 2012.
Interest in SBA loans soared two years ago after the agency temporarily eliminated fees on all loans and raised the guarantee limit. The elimination of fees on these smaller loans is an opportunity for Highland Bank in St. Michael, Minn., to reach out to customers about a chance to secure financing at a lower cost, Chief Executive Rick Wall says.
Lenders at Highland, which is a unit of Highland Bancshares, will use this as a selling point when discussing options with current and prospective customers. About a third of the $429 million-asset bank’s SBA loans are less than $150,000, Wall says.
“This is another tool in [a lender’s] belt that is less expensive now,” he adds. “Our lending pipelines are more full than they have been in the last five years. More businesses have the capacity to borrow now. Some people feel like they have waited long enough to do something, and now they want try to expand their businesses.”
Following the recession, banks have been reluctant to make these smaller loans because they wanted to deploy their capital to areas where they could get the biggest returns, Hulit says. It takes almost the same amount of time to originate loans greater than $1 million as it does for ones that are less $150,000, and banks make more from the larger credit, says Ray Chiamulera, president of Radar Lender Services, a firm that helps lenders offer government-guaranteed products.
Eliminating fees is part of an initiative to make it more cost effective to originate smaller loans, Hulit says. For example, the agency is expanding its streamlined approval process for loans that are less than $350,000 to all 7(a) loans.
“It is purely economics for the lender,” Chiamulera says. “There are SBA lenders where it is a normal practice not to take up the time of the staff with loans that are smaller.”
Additionally, usually borrowers that require these smaller loans tend to be startups or businesses with less collateral, making them more risky and less appealing to lenders, Hulit says. But the SBA guarantee on these loans—usually up to 85% of the amount of the loan—can mitigate much of this risk, says John Edwards, the chief banking officer at Bangor Savings Bank in Maine.
Roughly 80% of the SBA loans that the $3 billion-asset Bangor Savings makes fall under $150,000, Edwards says. The bank is currently informing its lenders about the fee cancellations so they can promote it to customers. Its SBA loan pipeline for October is about twice as big as it was last year, he adds.
“This is a huge opportunity,” Edwards says. “These business owners want a relationship with the bank. If you take the time to advise them, it’s a good way to create that.”
The fee waiver is especially important for community banks, which make 60% of small-business loans, says Paul Merski, the chief economist at the Independent Community Bankers of America. Any reduction in costs will help community banks as they continue to struggle with low interest rates and tight margins.
“This is just another step to increase the flow of credit, which is the lifeblood to small businesses,” Merski says. “If we can get more going then there will be more job creation and tax revenue. All of this helps to jump-start the economy.”