Improving the Small Business Administration’s 7(a) Loan Program

Overview

Since 2020, when the COVID-19 pandemic first began, the Small Business Administration (SBA) has distributed nearly $1 trillion of federal funds for economic relief to small firms — an amount more than 10 times the agency’s typical annual budget.[1] This outlay surpasses the total amount of aid previously distributed by the SBA in its entire 67-year history for all other disasters combined.[2] Such figures are truly unprecedented, and a reflection of the SBA’s growth in organizational efficiency and national visibility during the pandemic.

While the SBA’s COVID-19 relief programs have garnered the most attention, many of these COVID-specific efforts have already come to a close. Most notably, the Paycheck Protection Program (PPP) concluded on May 31, 2021,[3] and the COVID-19 Economic Injury Disaster Loan program ceased to accept new applications as of January 1, 2022.[4] Yet the SBA’s charge of efficiently and effectively supporting small-business recovery and growth remains. At the moment, it appears that much of this support will take the form of revamped and revitalized core programs that existed prior to the pandemic, with the SBA’s flagship 7(a) loan program serving as a prime example. 

A timely question is: What lessons from the SBA’s efforts during the pandemic can be applied to improve the ongoing 7(a) loan program in order to ensure efficient operation, equitable access and successful results?

The 7(a) Loan Program

The SBA’s 7(a) loan program, which is its most common loan program,[5] existed prior to the COVID-19 pandemic. Traditionally, these loans have been used for the purchase of working capital or real estate, as well as for new construction.[6] Such loans may be backed by the additional support of an SBA guarantee if the borrower does not meet traditional underwriting guidelines.[7] These guarantees reduce the risk for banks or credit unions to lend to small businesses that “might not otherwise obtain financing on reasonable terms and conditions,”[8] and expand access to credit for small businesses that “often lack relationships with established lenders.”[9] In recognition that underrepresented small business owners may not have the same access to conventional bank loans that larger firms enjoy,[10] especially in the wake of barriers and challenges exacerbated by the pandemic,[11] the SBA’s 7(a) loan program is intended to help bridge such gaps in access to capital.

Improvements in Technology

In FY 2021, the number of 7(a) loans approved by the SBA surpassed 50,000, totaling more than $36.5 billion[12] and supporting an estimated 46,000 small businesses.[13] According to the SBA’s FY 2021 Annual Performance Report, these record-breaking figures can be attributed in part to a “pivot to virtual processes necessitated by social distancing, remote communications, and the reduced operations and shutdown of many small businesses.”[14]

During the early stages of the pandemic, the high volume of applicants for PPP loans highlighted the need for strong technological infrastructure to handle increased demand, streamline operations, and enable broader outreach.[15] While technological issues such as backend system crashes, slow portals and data breaches[16] are known to have occurred during the pandemic, the lessons learned from this period can and should be used to sustain future advancements and improvements. A focus on technology and innovation should remain at the forefront of the SBA’s core programs, including the 7(a) loan program, to ensure greater accessibility and efficiency.

Equitable Access

According to the SBA’s FY 2021 Annual Performance Report, an estimated 42% of all approved 7(a) loans from FY 2021 went to minority, veteran and women small business owners.[17] In particular, a recent Congressional Service Research report documents the breakdown of 7(a) loan approvals (by dollar amount) in FY 2021 as follows:

• 20.8% Asian-owned businesses ($7.6 billion out of $36.5 billion)[18]
• 6.0% Hispanic-owned businesses ($2.19 billion out of $36.5 billion)[19]
• 2.6% African American-owned businesses ($0.95 billion out of $36.5 billion)[20]
• 0.7% American Indian-owned businesses ($0.26 billion out of $36.5 billion)[21]

Furthermore, an SBA summary of data reported by lenders gives the following estimates for 7(a) loans approved in FY 2021:

• 13.7% women-owned businesses ($5 billion out of $36.5 billion)[22]
• 3.3% veteran-owned businesses ($1.2 billion out of $36.5 billion)[23]

However, these large dollar amounts and high volumes tend to obscure continuing needs.  As SBA administrator Isabella Casillas Guzman has noted, “While progress has been made, our data also tells a deeper story: Historic inequities in accessing capital persist, and we must do more to lower the barriers of entry to opportunity for all our entrepreneurs.”[24] For example, the number of small-dollar loans, which are particularly important to underrepresented entrepreneurial communities, has been declining in the 7(a) program.[25] This trend began before the pandemic, with SBA data showing that over the past five years, the number of 7(a) loans under $150,000 decreased by approximately 53%,[26] while the number of 7(a) loans under $50,000 decreased by approximately 58%.[27] These declines suggest ongoing challenges in reaching underserved markets and entrepreneurs. Hence, as the SBA shifts its focus away from pandemic assistance and back to its core programs, a renewed commitment to small-dollar loans and accessibility is important. Because SBA-backed 7(a) loans are primarily designed to reduce lender risk and increase the likelihood of loan approval for creditworthy small businesses,[28] such small-dollar loans fit well under this purview.

Uncertain Metrics

More generally, while measures exist to track both the volume of 7(a) loans and the demographics of 7(a) loan borrowers, reliable data on post-lending outcomes for small businesses is lacking, making it difficult to truly evaluate program success.[29] According to a study by the U.S. Government Accountability Office, “The program’s performance measures focus on indicators that are primarily output measures — for instance, they report on the number of loans approved and funded. But none of the measures look at how well firms do after receiving 7(a) loans, so no information is available on outcomes.”[30] In order to verify that the SBA’s core lending program is indeed achieving its intended results and building upon lessons learned from the pandemic, the collection and assessment of outcomes data is vital.

Conclusion

The challenges posed by the COVID-19 pandemic have provided an opportunity for the SBA to strengthen its operations and impact. For the agency’s long-standing 7(a) loan program to build upon these recent lessons, a continuing commitment to technology and innovation, renewed outreach efforts to improve access to small-dollar loans, and a focus on meaningful metrics are all essential.

Endnotes