For decades, the Small Business Administration (SBA) has been one of the most important sources of capital for America’s entrepreneurs—especially those just starting out or operating on a small scale. But recent lending trends suggest the program may be drifting away from the smallest businesses it was designed to serve.
My first interaction with the Small Business Administration (SBA) was in the late 1980s/early 1990s, when President George H.W. Bush appointed Susan Engeleiter, the first woman to lead the agency. Later, I served on the SBA’s National Advisory Council during the Clinton Administration.
In 2010, President Obama signed the Small Business Jobs Act into law, increasing the number of loans the SBA guaranteed and lowering 7(a) loan fees. After the law was passed, SBA lending rose nearly 30%.
Since the agency was founded, the SBA has made millions of loans to the nation’s small business owners, helping fuel the entrepreneurial boom of the 1990s and rescuing many businesses from the devastating impact of COVID.
Is that coming to an end?
A Troubling Shift in SBA Lending
Writing in The 21 Hats Morning Report, Loren Feldman’s excellent Substack newsletter, Ami Kassar, CEO of MultiFunding, says he’s concerned that “the program appears to be drifting away from the smallest businesses it was designed to serve.”
I’m sharing some of Kassar’s key observations below and encourage you to read his insightful post.
The federal fiscal year starts in October, and Kassar notes that already, SBA “lending is slowing in an unexpected way. From October 1 through the end of February, lenders approved $11.8 billion in SBA 7(a) loans, down from $14.6 billion during the same period last year—a decline of about 19.6%.”
But he says what’s more striking than that decline is that the number of loans to date is down 36.5%, which “means loan counts have fallen nearly twice as fast as total lending volume. The key change is…a significant shift in the types of loans being made.
“The clearest signal of that shift is the average loan size. Last year, the typical SBA 7(a) loan was about $429,000. This year, it has climbed to roughly $544,000. Fewer loans. Larger loans.” Kassar says this shows “the real decline is happening at the smaller end of the market.”
Why Smaller Loans are Disappearing
In a previous post, Kassar wrote, “When access to SBA loans tightens, demand often spills into alternative lending. The latest SBA numbers suggest that tightening may already be underway.”
He also notes that some major SBA lenders’ loan volume is running behind last year—by the billions of dollars. And he says, “When lenders that large fall that far behind the previous year’s pace, it’s a strong signal that something structural—not just cyclical—is happening in the SBA lending market.”
Kassar lists some factors contributing to this shift, including the return of SBA borrower fees, which raised borrowing costs and led to more defaults by small businesses. “As those defaults increased, the SBA tightened oversight, and lenders became more cautious,” shifting their economics.
As Kassar notes, “Small SBA loans have always been less profitable for banks. A $100,000 loan often requires nearly the same underwriting, compliance work, and servicing as a $1 million loan but generates far less revenue.” So, as the cost to make smaller loans increases, lenders start to drop them. And yet, Kassar writes, “…lenders appear far more willing to compete for [larger] deals.
“In other words, the SBA lending market isn’t disappearing. But the smallest loans increasingly are.”
What This Means for Entrepreneurs
This raises questions about the program’s future. Kassar writes, “The SBA 7(a) program has long been one of the most important sources of capital for smaller businesses, startups, and first-time entrepreneurs…If the smallest loans continue to disappear, the smallest entrepreneurs will have fewer options.”
Kassar’s concern (one I echo after reading his column) is that part of the SBA’s core mission is to increase access to capital for smaller and underserved businesses. If “smaller loans [become] harder to originate, the agency risks drifting away from that core purpose.”
Of course, he writes, “The SBA also has a responsibility to maintain sound lending standards and protect taxpayer dollars. But [it] might need to strike a balance between opening up too widely…and closing up too tightly now.
“If the trend toward fewer small loans continues, the SBA program may ultimately move away from supporting its original audience: the smallest businesses most in need of access to capital.”
For decades, SBA loans have helped countless entrepreneurs launch and grow their businesses. If access to those loans begins shrinking at the smallest end of the market, it’s something policymakers—and small business owners—should be paying close attention to.
If you are concerned about this issue (and I believe small businesses should be), contact your senators and congressional representatives to share your concerns.
Rieva Lesonsky is the founder of Small Business Currents, a content company focusing on small businesses and entrepreneurship. You can find her on Twitter @Rieva, Bluesky @Rieva.bsky.social, and LinkedIn. Or email her at Rieva@SmallBusinessCurrents.com.
Photo courtesy Getty Images for Unsplash+
