The SBA’s flagship 7(a) program fell just short of another record setting year in FY2018, with $24.37 billion in authorized loan volume through the 12 months ended September 30, 2018. Had this number reached $24.45 billion, FY2018 would have represented the sixth consecutive year of overall growth. Despite the growth streak being snapped (which could actually be a good sign for commercial lending according to American Banker), several other SBA 7(a) Loan Program trends have continued to “stay the course” through FY2018.
This article will discuss four key trends Windsor has identified that have remained consistent year-over-year through the previous five fiscal years.
The average loan size continued to trend higher, reaching $420,401 in FY2018. In response to a strengthening economy during this five-year period, the number of new businesses in the United States increased. The FY2018 year-end report issued by the SBA indicates that the total dollar volume of loans approved through the program used to assist new businesses jumped from 30% in FY2014 to over 70% in FY2018.
In addition to many new businesses requiring larger loans for larger scale projects with higher price tags (ex. ground-up construction), inflation has also played a role in this trend. Assuming a 2.0% inflation rate for each year during this period alone, the average loan size would have reached nearly $400,000, up from $368,737 in FY2014.
The number of lender participants in the program continued to drop from 2,244 in FY2014 to 1,810 in FY2018 – the lowest level of active lenders in over a decade. During this time frame, the overall decline in the number of FDIC-insured commercial banks in the United States has certainly helped shape this trend. In 2014, there were over 5,600 banks which has dropped to roughly 4,900 in 2017, according to the Changes in Number of Institutions report published by the FDIC.
M&A activity is not the only variable impacting this trend. As seen in the last section of this article, competition among the top 50 lenders participating in the SBA program continues to intensify year-over-year. As specialty 7(a) bank and non-bank lenders continue to focus their efforts on increasing volume, community lenders have become more inclined to overlook the investments required that enable them to compete effectively in the space. Contact [email protected] to learn more about how to get started without hiring staff or incurring upfront expenses.
The percentage of total dollar volume authorized continues to trend towards the Preferred Lender Program (PLP). As the small business lending environment has grown more competitive, lenders have expanded their use of Delegated Authority to reduce closing timelines and remain competitive.
Changes to the SOP in recent years have helped to provide confidence and flexibility for lenders choosing to utilize Delegated Authority. For instance, business acquisitions with more than $500,000 in goodwill no longer require 25% equity (from a buyer and seller combination), but rather 10% equity when processed PLP. Less capital required upfront has likely resulted in more business acquisitions under Delegated Authority. Furthermore, clarity on affiliation has assisted lenders in determining who must be a guarantor and the amount of “guaranteed dollars” available to the small business.
The loan volume to be a top 50 lender has significantly increased since FY2014. Five years ago, a lender had to authorize approximately $60 million in 7(a) loans on an annual basis to rank in the top 50. Volume requirements have grown by 66%, reaching a benchmark of over $100 million in FY2018 in order to cross into the “Top 50 Lender” category. This demonstrates an increase in lender concentration by dollar volume, more than likely due to more institutions specializing in 7(a) and Express product lines.
While some might assume this trend is the result of seasoned lenders further developing their SBA 7(a) programs, the reality is that almost 40% of lenders currently in the top 50 were not among the ranks five years ago. A considerable amount of top lenders have been able to effectively use technology to generate new volume and improve internal efficiencies in recent years.
This activity should be monitored closely by lenders looking to refine their SBA strategy and should be taken into consideration by potential new SBA lenders looking to develop a strategy for success when entering the market. Be on the lookout for Windsor’s 2019 Market Outlook Whitepaper in the coming months which will further dissect the SBA market and provide forward looking statements for each of these trends heading into FY2019.
Data Source: SBA 7(a) and USDA & 504 Loan Data Reports
About Windsor Advantage, LLC
Windsor Advantage is a Lender Service Provider that provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $2.1 billion in government guaranteed loans and currently services a portfolio in excess of $1.2 billion (as of October 31, 2018) for over 80 lenders nationwide. With more than 150 years of collective SBA experience, cutting-edge technology, rigid controls and consistent processes, Windsor Advantage is uniquely qualified to assist any sized lender with implementing a thoughtful and profitable government guaranteed lending initiative.
Windsor Advantage has a team of 26 professionals with offices in Chicago, Illinois; Indianapolis, Indiana; and Charleston, South Carolina.
About the Author: Andrew Sheaffer manages all business development functions at Windsor. He graduated from Miami University of Ohio with a degree in Strategic Communication. Previously, Andrew worked in Chicago at BMO Harris Bank where he worked with financial institution clients. He is responsible for all media relations and can be reached at (312) 248-8530.