SBA Lending in 2022: Trends, Headwinds & Opportunities

John Moshier, president of SBA lending at Ready Capital, provides his 2022 outlook for small-business lending.

A good many small-business owners, installing security contractors among them, looked to 2021 as a chance to rebound and rebuild from nearly a year of coronavirus-induced turmoil. Instead, many were dealt repeated blows with supply chain backups, unfilled “hiring” signs and renewed restrictions and mandates.

Banks also pulled back on business loans amid COVID-19, tightening lending criteria and even halting traditional loans to focus on Paycheck Protection Program (PPP) loans backed by the U.S. Small Business Administration (SBA). However, small-business loan approval rates can be expected to continue to rise as the economy and consumer spending rebound, especially for businesses working with community banks and nonbank lenders.

Ahead, John Moshier, president of SBA lending at Ready Capital, a nonbank real estate and small business lender, provides his 2022 outlook for SBA lending.

SBA lenders benefit as conventional lenders face headwinds through 2022

While we had expected to see a measurable upswing in conventional lender appetite by midyear 2022, new COVID concerns and politics (including 2022 midterms) are very likely to push that change out until 2023.

  • SBA lenders should expect to benefit from another year of larger banks being conservative with conventional lending, allowing SBA loans to fill the needs for small business lending.
  • Similarly, league tables reveal that many large banks have restricted/reduced SBA 7a lending even as borrower demand for access to capital loans remains elevated.
  • Given uncertainty (both continuing and new) and the low-rate, low-margin environment, conventional lenders (banks) will remain cautious, probably avoiding/limiting SBA lending in all but a handful of asset classes.
  • 2022 should continue to be a comparatively strong year for nonbank lenders, which are able to take advantage of the competitive advantage to provide access to capital where conventional lenders remain cautious.

SBA may have withdrawn incentives too soon

SBA lenders overall may become willing to accept smaller origination volumes as the SBA pulls back on incentives.

  • In normalized economic conditions the SBA 7(a) loan guaranty is 75% of a 7(a) loan’s balance, but for most of 2021 the SBA incentivized lenders by raising the guaranty to 90%, making 7(a) loans more attractive for lenders so they can lend to more businesses that might have been affected by the pandemic to encourage to provide a lending solution based on shorter analyzing of cash flow periods to get capital in the hands of these small businesses.
  • The Cares Act really worked well in the 7a space in 2021. Through its licensed lenders, the SBA was very successful getting money onto the street to support small and mid-sized businesses when that capital was otherwise difficult to find.
  • In October, the guaranty reverted to 75%. The industry is already observing that with a lower guaranty, SBA lenders may not be able to “stretch” to lend to certain borrowers or industries, risking a capital crunch.
  • Also in October, SBA withdrew an incentive for 7(a) borrowers that had been added during the pandemic: relief from the Guaranty Fee that borrowers pay. The restoration of this fee made 7(a) loans less attractive for borrowers and therefore could be hindering new origination as the cost of the guaranty fee is passed onto the borrower and the servicing fee that lenders pay is also an added cost to the loan.
  • Ready Capital believes the market is showing there is still the need to maintain a 90% guaranty (instead of 75%) as well as the relief on the Guaranty Fee. We strongly hope that both sides of the aisle will put politics aside and recognize how important it is to re-instate those benefits until the small business economy is fully out of the woods (probably 2023) and capital is more readily available.

Secondary market illustrates challenges for SBA lenders 

Secondary market premiums are already indicating that certain asset classes are/will become more challenging, especially at lower guaranty. Investors are showing reduced appetite for certain sectors that they believe are riskier, especially in an economy that is weighed down by an extended COVID hangover.

Broader economic difficulties impact SBA lending

While not identical to what is reported for retail and other industries, supply chain issues are impacting the SBA lending process in their own way.

  • SBA lenders rely on third-party reports to close loans, but logjams are delaying transactions while causing related issues.
  • Anecdotally, we have heard that third-party providers are running into the same issues as other industries: it is very difficult to find employees with the specialized skill sets to perform the work.
  • Many SBA lenders themselves also face a similar personnel challenge with a shortage of employees with specialized experience in SBA lending.

Moshier serves on the board of the National Association of Government Guaranteed Lenders (NAGGL). He has also appeared as a strategic partner to U.S. veteran families on the television show Military Makeover with Montel Williams on Lifetime.

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