SBA Loans on the Rise

Obtaining funding can be a challenge even for established black small-business owners. The Small Business Association’s 7(a) loan — which aids new and existing small business owners who might not qualify for a conventional loan — has gained in popularity within this demographic of entrepreneurs in Massachusetts.

SBA data for Massachusetts shows that fiscal year 2014, which began October 2013, has already shown an increase from FY 2013 both in the dollar amount of 7(a) loans and in the number of such loans granted to black-owned businesses in the state. Last fiscal year, 10 black-owned businesses in the state were granted 7(a) loans, totaling $1.1 million. Five months into this fiscal year, 18 black-owned businesses in the state have been granted these loans, the total of which exceeded $6 million. Black-owned businesses statewide received $4.4 million in 7(a) lending in FY 2012 and $4.9 million in FY 2011.Robert Nelson, the Massachusetts District Director for the SBA, attributes the increase in minority loans, especially to black businesses, to the elimination of the upfront fee on what are called “low-dollar loans” or loans for less than $150,000. He says by reducing this upfront fee that has to be shelled out by a small business before a loan is given, typically about $2,500 on a $150,000 loan, it makes the loans more attractive.

“We are seeing phenomenal activity here in Massachusetts on low-dollar loans,” Nelson said. “Massachusetts is number one in loan approvals for $150,000 or less.” According to Nelson, small businesses in Massachusetts have saved $350,000 in fees on low-dollar loans since the fee was eliminated; across the country this savings is over $6 million.

Loan data provided by the Mass. SBA office for Latino businesses is a good illustration of how the low-dollar loan activity has impacted the recent lending. Though the data from the start of the SBA’s fiscal year 2014 shows that overall 7(a) loans to Latino business is down in total money from $5.3 million last year to $2.9 million this year, there have actually been more loans than the same period last year — 32 so far in 2014 compared to 29 in the same period in 2013.

The SBA tracks data for minority business loans in several categories, including: American Indian, Asian or Pacific Islander, black, and Hispanic. Since the fee was eliminated, Asian or Pacific Islanders have totaled 63 loans for $20.2 million this year compared to 62 loans for $16.4 million last year. American Indians have totaled four loans this year for $725,000 compared to $933,800 last year. According to Nelson, while some of the other minority business categories have not seen a significant increase in loans, compared to last year, the rise in loans to black businesses is a success since these were the businesses the SBA was targeting more than the others.

As Nelson explained, black-owned firms represent about 3.4 percent of businesses in Massachusetts and in 2013, they received 2 percent of the SBA loans given out in the state — less than their overall business share. Asian-owned businesses represents about 4.5 percent of businesses in the state, but they received 8 percent of the SBA loans, almost double; and Latino businesses represented 3.3 percent of the businesses in the state and received 5 percent of the SBA loans, also greater than their business share.

The data provided by the Mass. SBA office showed that, so far this year, black businesses are up to 3 percent of the SBA loans provided almost matching their share of overall state business and on the rise. Nelson said the SBA hopes to see black businesses be able to double their percentage of SBA loans compared to their percentage of overall Massachusetts business as Asian- and Latino-owned businesses have come close to doing.

The SBA provides a number of financial assistance programs for small businesses including debt financing, surety bonds and equity financing. The SBA’s most common loan program is the 7(a) General Small Business Loans program, which provides general small business loans. Other programs include the Microloan Program, which provides small, short-term loans to small business and certain types of not-for-profit child-care centers; the CDC/504 Real Estate & Equipment Loans program, which provides financing for the purchasing of business assets such as equipment or real estate; and the Disaster Loans program, which provides disaster loans to homeowners, renters, businesses of all sizes and private nonprofit organizations.

The SBA does not make direct loans to small businesses. Its loans programs help set the guidelines for loans, which are then made by partner lenders, such as banks, community development organizations and micro-lending institutions. The big advantage provided by the SBA is that it guarantees that the loans made through its programs will be repaid. This eliminates some of the risk for its lending partners, and thereby provides access to capital for many small businesses that would otherwise not have it.

According to Nelson, through the 7(a) loan program, the SBA can provide lenders a guarantee of up to 90 percent of the loan amount, though most loan deals are made with a guarantee in the 75 percent to 80 percent range.

In Massachusetts, the top SBA lenders include Eastern Bank, Santander Bank, Citizens Bank, Rockland Trust Co. and TD Bank.

Eastern Bank has been the biggest SBA lender in Massachusetts for five consecutive years. Nelson said that Eastern Bank is also the top low-dollar lender for the state, as well.

Overall, Eastern Bank made 431 7(a) SBA loans in the state in 2013 for more than $22 million, according to annual reports from the bank. Eastern Bank also provided an additional 19 loans through the SBA 504 program for $12.2 million.

In addition to eliminating the fee on low-dollar loans to help small businesses, the SBA also eliminated the ongoing fee it charges lenders. Nelson said the intent was to give lenders more of an incentive to fund low-dollar loans.

According to Joe Bator, Eastern Bank senior vice president and business banking director, the elimination of the small business fees on low-dollar loans has had an impact on their loan activity.

“We are probably 30 percent over last year in that same sort of low-dollar loans. I would attribute at least half of that to the no fee,” Bator said.

Bator added that Eastern Bank would continue its low-dollar loan business regardless of the elimination of the lender fee from the SBA, but he pointed out that the savings is passed on to the small businesses, ultimately, so it is a good thing.

He said that Eastern Bank’s SBA lending success comes as a result of the bank’s focus on serving the small business market, the streamlining of the application process, and educating its lending team to better understand the value of offering loans to small businesses.

“We are committed to helping small businesses,” Bator said. “When the financial crisis happened we found the small businesses were the hardest hit. That is when we expanded our work with the SBA because we found those main streets businesses needed it the most.”

He also said that while some banks shrug off low-dollar loans because of the small dollar amounts involved, Eastern Bank’s ability to do so many low-dollar loans through the SBA makes it a substantial business. He estimated that about 100 of the bank’s SBA loans last year were far less than $150,000.

“If a $10 million loan goes bad you are in trouble. With $150,000 it is not as bad if it goes bad,” Bator said. More black businesses are responding to the changed banking philosophy.