The SBA 7(a) loan program encourages lenders to make loans to small businesses that the lenders would not have made without some form of credit enhancement.
The SBA 7(a) program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they would not be eligible for financing through conventional lending channels
Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land & building and leasehold improvements
Loan maturities range from 5 to 25 years and are fully amortizing:
5 – 7 years for working capital
10 years for equipment
25 years for commercial real estate
Loans are typically indexed to the Prime Rate and carry interest rates between 0.25% – 2.75% over the index
Vast majority of SBA 7(a) loans adjust monthly or quarterly
Other structures include hybrid adjusts and fixed rates
The SBA allows lenders to sell the guaranteed portion of SBA 7(a) Loans to investors on the secondary market
In 2019, 51,907 SBA 7(a) loans were approved with $23.2 billion of face value. The average approved SBA 7(a) loan amount was $446,487.
FY 2015 activity: $8.5 billion of guaranteed face sold
FY 2016 activity: $9.4 billion of guaranteed face sold
FY 2017 activity: $9.4 billion of guaranteed face sold
SBA 7(a) pool universe stats as of January 2019
4,152 pools outstanding
$33.67 billion of current face
71,311 loans outstanding
Section 7(a) Loan Program – Sales of Loans
Many originators of SBA loans sell the federally guaranteed portion of the loans into the secondary market. During 2017, approximately $25.4 billion of SBA 7(a) loans were approved and over $9 billion of these loans were both sold into the secondary market and pooled into securities.
Asset Class: Example of a SBA 7(a) Loan entering the secondary market
A $1mm SBA 7(a) loan is originated at 8.25% (Prime + 2.75%) to a manufacturing business; 75% of that loan is federally guaranteed.
The Lender sells the guaranteed portion ($750,000) to a secondary market participant. The loan is sold with a coupon of 6.575% (Prime + 1.075%) that is net of 1.675% fees and servicing.
The loan is settled via Colson Services, a subsidiary of BoNY, which verifies that the SBA guarantee is sound.
Payments of principal and interest are sent from the originator to Colson Services, which then forwards the amounts to the registered owner/holder of the loan.
Loan pools are aggregated by designated “assemblers” or “poolers”, of which approximately six currently are active and licensed. While the loan originator retains the loan servicing, the Fiscal and Transfer Agent (“FTA”), currently Colson Services Corporation, which is a subsidiary of Bank of New York, operates as the servicer for the SBA. Thus, when the federally guaranteed portion of loans are sold by an originator, payments of principal and interest are forwarded by the originator to Colson, which then forwards the amount to the owner of the pools or loans.
Risk characteristics of the SBA 7(a) asset class:
Secondary market investors take:
Little credit risk as the asset is explicitly guaranteed by the US Government
Little interest rate risk as the majority of loans adjust monthly and quarterly
What risks do investors in the SBA 7(a) asset bear?
The guaranteed portion of SBA loans can be sold in the secondary market either as individual loans with a Guaranteed Interest Certificate or as loan pools with a Guaranteed Loan Pool Certificate. Under the terms of the Guaranteed Interest Certificate, the SBA guarantees the payment of principal and interest on the loan underlying the Certificate. The SBA will pay principal and interest on the loan up through the date of payment by the SBA. In this form, payment of principal and interest up to the time of payment is guaranteed by the SBA which is backed by the full faith and credit of the United States, but such payment is not guaranteed as to timeliness.
When individual loans are sold and formed into pools, the purchaser of the pool receives a Guaranteed Loan Pool Certificate. Under the terms of the Guaranteed Loan Pool Certificate, the SBA guarantees the timely payment of principal and interest on the loans underlying the Pool Certificate. The SBA will pay principal and interest on the loans underlying the Pool Certificate through the date of payment by the SBA, with such payments guaranteed as to timeliness.