It’s been three years since the start of the COVID-19 pandemic and small businesses are still struggling. Not from closed doors or nationwide lockdowns like they were in the past few years, but from another headache: inflation.
A little less than a year ago, 34% of small businesses were still closed due to COVID-19. And today, while many small businesses have bounced back, the crushing weight of inflation is putting another hurdle in the way of success for these companies.
At the same time, the U.S. Small Business Administration (SBA) has continued to adjust and adapt. After all, between high borrowing costs, customers fed up with high prices, big-box retailers pounding the competition and business owners dipping into savings to make ends meet, small businesses haven’t caught a break in years.
This should be a time of opportunity for small businesses, and commercial mortgage originators need to be ready to give these business owners the best possible service. As part of such service, brokers need to know the proposed changes at the SBA that may help small businesses find success. If the past several years have taught us anything, it’s that small businesses are resilient and loan originators need to be prepared for whatever comes next in the current market.
The SBA is proposing changes to its current fiscal year budget, which ends Sept. 30, 2023, that will expand the agency’s lending capabilities and the services it provides to small-business owners. The requested budget increases the lending authority for the SBA’s popular 7(a) program from $30 billion to $35 billion. It also would raise the ceiling from $7.5 billion to $9 billion for the 504 lending program. Additionally, all 7(a) loans of $500,000 or less will have upfront guarantee fees and ongoing servicing fees waived, the latter of which are typically charged to lenders on each loan made.
The SBA has requested a $26 million increase to its internal budget, too, proposing a total outlay of $1.06 billion in 2023. This will help the agency support small businesses still affected by the pandemic, expand entrepreneurial and capital opportunities, and accomplish other priorities. The Biden administration is sending a clear signal to the SBA, its lenders and its borrowers: The demand for additional capital is high and the budget should reflect this. Considering ongoing inflation rates, it is unclear whether the $1.06 billion budget will be enough to sustain U.S. small businesses for the foreseeable future.
Mergers and acquisitions activity began to slow down in late 2022, a trend that could continue through first-quarter 2023. It’s anticipated that the Federal Reserve will continue to increase benchmark interest rates this year, but the rise in rates shouldn’t be as aggressive as in the previous 12 months.
On the flip side, conventional lenders are more than likely to become conservative this year, which means that SBA loans will be in greater demand. One thing to keep in mind is that even though commercial mortgage lending volumes were down in 2022 as compared to 2021, they remain well above pre-pandemic low points. With a potential recession looming, access to capital will be an important priority for small businesses.
With 2023 now well underway, many entrepreneurs are choosing to pursue their dreams of being a business owner, and access to capital is critical to their success. Originators must be prepared to help these clients navigate the challenges and opportunities that lie ahead.
When a client comes forth with a need, it can be difficult to quickly learn the scope of their business without knowing the ins and outs of a particular industry. To assist with this, take time to dive into the history of a client’s business, their field of work, current business operations and more. Uncovering these small details can provide mortgage brokers the knowledge and confidence to better support their clients and help them secure the right loans.
In the first quarter of 2023, start investing in the rest of this year. Plan meetings not only with clients but also with lenders and colleagues. For owners of independent brokerages, plan out and organize any needs your company will have during the year, identify areas of cash inflow and outflow, and ask questions about where the business is headed in the future.
Front-line originators should try to point out opportunities for growth to their management team, develop priority goals for the year and brainstorm new ways of accomplishing efforts without skimping on quality. By recognizing where a business stands early in the year, you’ll be better positioned for success as the year progresses.
In addition, originators should reach out to their internal management team to produce a credit policy that fits the firm’s appetite. Due to the recent interest rate hikes, loans that would have worked in the past may not work in today’s environment. It’s always beneficial to be in sync with credit requirements.
Updates and changes
Late last year, SBA administrator Isabella Casillas Guzman announced updates to the launch of SBA’s new Veteran Small Business Certification program. The announcement included the intention to grant a one-year extension to firms verified by the U.S. Department of Veterans Affairs as of the Jan. 1, 2023 transfer date. This extension will allow the SBA more time to process applications smoothly.
The certification program officially began operations in 2022, taking new applications to officially certify both veteran-owned small businesses (VOBs) and service-disabled veteran-owned small businesses (SDVOBs), which make up about 6% of the nation’s business entities. Applicants certified in 2023 will obtain the distinction for the standard three-year period. These new mandates further imply the SBA’s strong commitment to veterans and its dedication to ensuring VOBs and SDVOBs receive the recognition and financial support they deserve.
Among other updates to the Community Advantage program, the SBA increased its maximum 7(a) government-guaranteed loan program size to $350,000, which represents an increase from the early 2022 levels of $250,000. This $100,000 increase cannot be understated. When a need for financing is demonstrated and alternatives have been exhausted, these SBA loans can help reduce risk and provide the critical financial support to keep businesses afloat in a potential recession.
As previously mentioned, the elimination or reduction of upfront fees is a new SBA feature for this year. It’s important that lenders, brokers and borrowers keep these updates in mind for new loans in 2023. The upfront fees for fiscal year 2023 — excluding loans through the Export Working Capital Program and SBA Express loans made to VOBs — are as follows.
For loans with a maturity that exceeds 12 months, the upfront fees are:
0% for loans of $500,000 or less
0.55% for the guaranteed portion of loans of $700,000 or less
1.05% for the guaranteed portion of loans of $1 million or less
3.5% for the guaranteed portion up to $1 million, plus 3.75% of the guaranteed portion of any remaining amount up to $5 million
For loans with a maturity of 12 months or less, the upfront fees are:
0% for loans of $500,000 or less
0.25% for the guaranteed portion of any loan amount up to $5 million
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As a commercial mortgage broker, you’re aware that small businesses are the bedrock of the American economy. The SBA federal credit programs, which were created by Congress in 1953 to protect and support these companies, also recognize this. By starting the year off right, anticipating changes and identifying updates to new processes, mortgage brokers and lenders will continue to help keep the doors open for their small-business borrowers. ●
Sherwin Patidar is executive vice president of SBA lending at Merchants Bank of Indiana, based in the Chicago regional office. He is a founding member of First Colorado National Bank and has more than 15 years of experience specializing in SBA lending. In his current role, his responsibilities include generating new SBA 7(a), SBA 504 and USDA loans in accordance with bank guidelines. He also develops and implements business plans and marketing strategies to aid in identifying areas of opportunity for new business penetration.
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