Tightening credit markets have claimed a new casualty: Small Business Administration loans. Not only have entrepreneurs turned more cautious about seeking credit from the SBA, experts say, but banks have increased their credit standards for the agency's government-guaranteed 7(a) loan program, turning away businesses they might have funded only a year ago.
"I attribute this to a weaker economy," says Eric Zarnikow, associate administrator for capital access at the SBA. "The [7(a)] data has followed a similar pattern to Federal Reserve data on commercial loans."
The SBA backed about 40,000 of its flagship 7(a) loans in the quarter ending Mar. 31, 2008, down 18% from the second quarter of 2007. Particularly hard hit are women, veterans, and rural entrepreneurs, where the number of loans has fallen 15%, 20% ,and 27%, respectively. Express loans—a popular, easier to originate component of the portfolio which carries a lower government guarantee—are down 30%.
Demand Is Down
According to the Federal Reserve's most recent Senior Loan Officer Opinion Survey on Bank Lending Practices, for April, 2008, 55% of domestic banks reported tightening credit standards for commercial and industrial loans, compared to 30% in January, 2008.
Zarnikow says SBA-sponsored roundtables with its lenders over the last few months indicate demand from small business borrowers is down. Banks are also seeing fewer creditworthy borrowers, and at the same time they are tightening credit standards. He adds that lenders also became too lenient with their credit scoring of loan candidates. "Losses were too big, so they began increasing credit scores last fall," Zarnikow says. Delinquencies in the 7(a) portfolio have also increased, rising more than 50%, to 2.39% of the portfolio as of February, 2008, the SBA says.
Should Be Seeing More Volume
However Congresswoman Nydia Velazquez (D-NY), chairwoman of the House Small Business Committee, says the SBA's declining loan volume can't be attributed entirely to the bad economy. "It is important to remember the SBA's loan program was created to kick in during tough times," she says. "It was designed to provide a counterbalance when private sector lenders have to tighten their standards."
Tony Wilkinson, president and chief executive officer of the National Association of Government Guaranteed Lenders, a trade association representing banks that issue the SBA's guaranteed loans, agrees that the drop-off should not be as bad as it is. "We should be seeing more volume than we are today," he says, adding the reasons for the decline are a confluence of negative events. These include an elimination in many national markets of home equity used to either start businesses or collateralize loans for them; higher origination and maintenance costs that make 7(a) loans less profitable for bankers; and the departure of more than 368 banks from the 7(a) program since 2006.
Zarnikow says the large drop-off in express loans, originated primarily by a handful of larger banks, has skewed the results for the portfolio. Unlike traditional 7(a) loans, express loans are for smaller amounts, typically less than $350,000. Banks are now requiring higher credit scores before approving these loans. He points out that the dollar volume for the portfolio is down only 9%, to $6.2 billion for the quarter.