The SBA’s New Working Capital Pilot Program Launches Today

Most people probably couldn’t tell you who the poet Samuel Taylor Coleridge was, but odds are they are familiar with the famous line from his poem “The Rime of the Ancient Mariner”: “water, water everywhere and not a drop to drink.” Unfortunately, that line rings true for many people around the world. Though water comprises 71% of the earth’s surface, 97% of that is salt water that cannot be consumed or used to grow crops. As a result, 26% of the world’s population lacks safe drinking water.Just as many people around the world struggle with access to clean drinking water, many small businesses continue to struggle to access the financing they need for their organizations through traditional lenders. The Small Business Administration (SBA) is stepping in to help bridge the financing gap for small and medium-sized businesses (SMBs). A New Avenue for SMB LoansStarting today, the SBA is offering its 7(a) Working Capital Pilot Program for lenders and borrowers alike that makes government-backed lines of credit available for up to $5MM. According to the SBA, in addition to an annual fee, maximum interest rates for the capital lines it offers are based on the prime rate plus 3% to 6.5%, which translates to between 12% and 15%. Under the program, credit lines below $150K have an 85% guaranty, while those at $150K and above have a 75% guaranty. The new program, which will run through July 31, 2027, is an effort by the SBA to simplify the availability of capital lines for smaller businesses pursuing expansion or new contracts. Through the SBA’s current 7(a) loan program, which provides lenders with guaranties in an effort to bolster loan activity for small businesses, the organization issued 57K loans in 2023 worth a combined $27.5B, the majority of which were for less than $350K. Meanwhile, the SBA’s Express loan program for credit lines up to $500K has been struggling, largely because of the fact that it only has a 50% guaranty, according to the agency. Impact on SMB LendersBased on research from PYMNTS Intelligence, there should be plenty of demand for the new program, as only 8.5% of SMBs have been able to easily access working capital loans from traditional financial institutions as banks have become more cautious in their lending. Meanwhile, as of the start of 2024, more than 50% of SMBs had plans to seek out new credit lines this year, with more than 26% willing to do so through online lenders. The SBA is expecting to approve 270 loans through the pilot program in 2025, for a total value of $337MM.Luckily, for potential lenders, there is no shortage of SMBs. There are currently 33.3MM SMBs in the US, according to the SBA, and research from Goldman Sachs found that concerns about access to capital are top of mind for roughly 77% of them, with 28% of small business borrowers viewing the terms of the credit lines they have been able to access as predatory. Once again, race seems to remain a factor in the accessibility of capital, as Goldman found that only 32% of black-owned small businesses that sought lines of capital were successful, compared to 47% of white small business owners.  As community financial institutions seek to strengthen ties to existing small business customers and attract additional ones, they may want to consider participating in the SBA’s new capital program or helping customers access it. The SBA is currently seeking comments on the program through August 14, 2024. Your feedback on the program can be submitted directly to the SBA through a public comment form.For those that choose not to wade into the newest SBA loan program, focusing on strong customer service for small business clients and finding ways to demonstrate your organization’s knowledge about their unique needs will remain critical to maintaining ties to this demographic in the wake of this new alternate form of financing.