March 18, 2020
By: Caity Witucki
Contributing Editor, C-Suite Wednesday
C-Suite Wednesday – SBA Lenders Enter Uncharted Territory With COVID-19 Disaster Loans
Last week, the President instructed Congress to increase SBA funding by an additional $50 billion so that the Agency could provide capital and liquidity to small businesses affected by the Coronavirus. However, A Congressional review of the SBA’s disaster-relief and 7(a) lending programs shows that the Agency has never dealt with this level of economic injury. As a result, lenders will need to work closely with the SBA to manage the magnitude of new funding opportunities for small businesses impacted by the virus.
This is unprecedented territory for the SBA’s disaster and 7(a) lending programs. According to a 15-year review of the SBA’s disaster loan program, the majority (83%) of past disaster loans were to individuals for property damage caused by weather incidents. Only 11% were to businesses and 6% for economic injury disaster loans (EIDL). Likewise, the SBA’s 7(a) lending program already has to manage an average of $30 billion in loans per year and additional funding opportunities for small businesses may put undue strain on lenders.
If legislation introduced in Congress last week passes, the SBA and its private-sector lending partners will need to quickly distribute nearly double the Agency’s average annual loan amount. However, there may not be enough qualified SBA lenders to distribute the funds. Only 14% of all banks, nonbank lenders and credit unions have made SBA loans in the past 12 months and most private lenders have never made disaster loans at all.
Having access to capital as quickly as possible will be critical to the survival of many small businesses. However, without guidance from the SBA and qualified lenders, the additional funding will not reach small businesses in time to save the economy. Therefore, SBA lending institutions need to begin preparing for an influx of disaster loan and 7(a) applicants and should ensure that they are up to date on all SBA rules and procedures.
The SBA has not yet laid out rules for how the $50 billion in new funds will be distributed during the coronavirus outbreak. However, the Agency is expected to provide lenders with more guidance once a legislative decision is made later this week.