The SBA Is Guaranteeing Far Fewer Loans

As loan counts fall sharply and average sizes rise, the program appears to be drifting away from the smallest businesses it was designed to serve.

Five months into the federal fiscal year, Small Business Administration 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 percent.

But the more striking number isn’t the dollars. It’s the number of loans. At this point last year, the SBA had approved 34,105 loans. This fiscal year, the number is 21,638 — a 36.5 percent drop. That means loan counts have fallen nearly twice as fast as total lending volume. The key change is not just a slowdown in SBA lending, but 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. That combination indicates that the real decline is happening at the smaller end of the market. In a recent column, I wrote that small businesses increasingly operate between two interconnected capital systems: the structured world of SBA lending and the faster-moving alternative capital market. When access to SBA loans tightens, demand often spills into alternative lending. The latest SBA numbers suggest that tightening may already be underway.

The slowdown is visible not only in the program’s overall totals but also in the activity of many major lenders. Several prominent SBA lenders are running far behind last year’s pace. J.P. Morgan Chase, for example, is currently at about 12.2 percent of the SBA loan volume it had produced at this point last year. Lendistry is at roughly 16.7 percent, ReadyCap about 17.5 percent, and Northeast Bank around 20.9 percent. Taken together, those four lenders alone are roughly $2.5 billion behind the pace they were running at last year.

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. Several factors could be contributing to the shift. One is the return of SBA borrower fees. During the pandemic recovery period, the Biden administration waived certain fees on smaller SBA loans to stimulate lending and expand access to capital for very small businesses. Once those waivers ended and fees returned, borrowing costs rose — particularly for smaller transactions, where fees represent a larger share of the total loan amount.

Another factor involves changes inside the SBA program itself. In recent years, the agency encouraged lenders to expand access to capital by allowing more automation and streamlined underwriting for smaller loans. The goal was to make it easier and faster for very small businesses to obtain financing. But some lenders later experienced rising early defaults on some of those loans. As those defaults increased, the SBA tightened oversight, and lenders became more cautious. That shift changed lenders’ economics.

The reality is that 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. To top this off, when oversight tightens and early defaults rise, these smaller loans become even more expensive and complicated for lenders, and they drop them.

Some lenders reduced their activity. Others exited the small-loan segment entirely. We are seeing that shift firsthand at MultiFunding, where we help businesses secure financing. Over the past year, it has become noticeably more difficult to get smaller SBA loans approved. Several lenders active in that market have either scaled back or exited it altogether.

At the same time, demand for larger loans remains strong. We continue to see solid interest from businesses pursuing acquisitions, expansions, and refinancings that require larger financing packages, and lenders appear far more willing to compete for those deals. In other words, the SBA lending market isn’t disappearing. But the smallest loans increasingly are.

That shift raises an important question about the program’s future. The SBA 7(a) program has long been one of the most important sources of capital for smaller businesses, startups, and first-time entrepreneurs — the borrowers who often struggle to access traditional bank financing. If the smallest loans continue to disappear, the smallest entrepreneurs will have fewer options.

And when businesses cannot access SBA financing, many inevitably turn to alternative lenders that charge significantly higher pricing than traditional SBA-backed loans. That should concern policymakers as well. Expanding access to capital for smaller and underserved businesses has always been central to the SBA’s mission. If structural changes in the program make smaller loans harder to originate, the agency risks drifting away from that core purpose.

To be sure, the SBA also has a responsibility to maintain sound lending standards and protect taxpayer dollars. Rising early defaults cannot be ignored. But the SBA might need to strike a balance between opening up too widely, as it did during the Biden administration, 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.