- The U.S. Small Business Administration plans to issue a new SBA loan option for small businesses.
- The new pilot program will extend lines of credit of up to $5 million and will charge an annual fee and a maximum interest rate that is 3% to 6.5% higher than the prime rate.
- Lenders will receive a 75% guaranty on loans larger than $150,000 and an 85% guaranty on loans smaller than $150,000.
The U.S. Small Business Administration (SBA) announced plans this week to issue a new government-backed SBA loan option for small businesses. SBA Administrator Isabel Casillas Guzman unveiled the news in an interview with CNBC, which broke the news.
The new pilot program, which will extend lines of credit of up to $5 million, will allow business owners to either fund specific projects or borrow against their assets. Borrowers will be charged an annual fee and will face maximum interest rates that are 3% to 6.5% higher than the prime rate, topping out at around 12% to 15%.
The new loans aim to bring more compelling offers to both lenders and borrowers than the SBA’s existing 7(a) loan program. The 7(a) loan program incentivized lenders to loan to small business owners by providing guaranties to the lenders. Last year, the program backed 57,000 loans valued at $27.5 billion.
And even though the loan amount represents a 7% increase from 2022 levels, Guzman expressed that the growth is less than ideal. The same is true for two other SBA products, the SBA Express loan, which offers up to a $500,000 line of credit, and the CapLines loan product, which didn’t appeal much to lenders because of its complicated structure.
“This product is our aim to increase access to a simpler working capital line,” Guzman told CNBC. “It basically takes the best of our various options to create a pilot program to see if we can get more borrowers an affordable working capital line, versus just a pure reliance on credit cards.”
Lenders may find the new loans especially appealing, as they limit risk. Lenders receive a 75% guaranty on loans larger than $150,000 and an 85% guaranty on loans smaller than $150,000. “In an environment of higher interest rates, we want to make sure that the SBA is an option for more businesses,” Guzman said in the CNBC interview.
The SBA’s new working capital offering may impact the competitive landscape. Fintechs and traditional banks have provided lines of credit and working capital solutions with varying degrees of accessibility and interest rates for a long time. However, the SBA’s new government-backed line of credit promises accessibility and affordability for the borrower, as well as a 75% to 85% guaranty for the lender. While fintechs often attract small businesses with their quick approval processes and attractive user interfaces, they can come with higher interest rates and less favorable terms compared to traditional banks. Banks, on the other hand, offer more stable and lower interest rates but have rigid credit requirements and slower processing times. The SBA’s new program, which will go live “in the coming months,” will help bridge these gaps.