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The State of SBA 7(a) Lending in Fiscal 2021

Small business owners smiling by the register of their coffee shop.

Since its origins in the early 1950s, 7(a) lending has been the flagship program of the Small Business Administration (SBA). Given the economic conditions emerging in the wake of the pandemic, 2021 is likely to be a critical year for the program and the businesses it serves.

During fiscal year 2020, which ended September 30, the SBA approved 42,302 7(a) loans for $22.6 billion dollars. This was a decline from the $23.2 billion approved in the previous year. Given the turmoil of the small business economy and the massive amount of economic relief delivered through the Economic Injury Disaster (EIDL) and Paycheck Protection Programs (PPP), the fluctuation is easy to understand.

But as the US economy begins to emerge from this crisis and businesses start down the long road to recovery, 7(a) loans are expected to once again emerge as a critical component of the recovery effort. This is especially true when you study the typical uses of proceeds for these loans and the industry sectors that tend to use the money.

The increase will also be supported by enhanced government guarantees and the reduction of fees during the remainder of this fiscal year, through the Economic Aid Act signed in December.

The SBA has reported that in recent years, the typical use of proceeds for 7(a) loans are:

  • Purchase land or make improvements (26.62%)
  • Purchase a business (17.06%)
  • Finance working capital (15.59%)
  • Pay off loans, accounts payable or notes payable (13.23%)
  • Construct new buildings (6.06%)
  • Purchase equipment (5.76%)
  • Make leasehold improvements (3.25)
  • Renovate current buildings (2.39%)
  • Refinance existing debt (1.40%)
  • Cover other expenses (8.64%)

When you consider this list against the backdrop of what small businesses have faced in recent months, the need for government guaranteed lending is clear. This is especially true when studying the business sectors most impacted by the pandemic and those that are historical users of the 7(a) program. The following table from small business resource FitSmallBusiness.com reveals the top ten industry sectors for 7(a) loans during the years 2010 through 2018.

Chart depicting the top 10 SBA loans by industry, with full-service restaurants coming in first.

In reviewing this list, it’s important to note that the leisure, hospitality, personal services, and healthcare sectors of our economy have been some of the hardest hit during the pandemic. As these businesses navigate their way through the recovery process, access to capital from government guarantee programs will be critical. These are also the same sectors that have dominated use of PPP funds, with more than 6.4 million loans and $623 billion in disbursements since its inception in April 2020.

Community financial institutions have answered the call during recent months, and their continued service will be needed in the year ahead. Prior to the pandemic, roughly 1,700 lenders participated in the 7(a) program each year. Nearly 5,500 lenders have participated in the PPP initiative. It’s unclear how many of those new SBA lenders will seek credentials for the 7(a) program, but their business clients may need them to stay involved.

Working capital financing will be important to small businesses attempting to take advantage of the 2021 recovery process. As the country continues its vaccination strategy and the spread of the virus diminishes, small business owners will be seeking to ride the recovery wave as far as possible.

For many, the process will feel like starting a new business. Many others will, in fact, be starting new businesses, having purchased assets from those that didn’t survive the recession in 2020. Evidence of this is the fact that applications for new employer identification numbers spiked more than 40% last year, according to the Census Bureau.

The million-dollar question of early 2021 has been, when will we emerge from the COVID-19 crisis? While no one knows the answer, there are now signs that we could experience a strong economic recovery in the second half of the year, once vaccination efforts take hold.

As that occurs, there’s likely to be a significant response from consumers and businesses toward economic expansion. The question for your institution is, what role will you play in funding that expansion?

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