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How SBA is Reforming Small Business Lending

By any standard, the Small Business Administration (SBA) was busy last year. In addition to its “normal” operations, the agency was still winding down pandemic-era relief programs. SBA also finalized and implemented two regulatory rules and proposed two additional rules pertaining to its lending support programs. Additionally, the agency proposed changes to the Small Business Investment Company (SBIC) program, which incentivizes equity investments in small businesses.

Taken together, these effective and proposed rules have the potential to significantly change a small but vital part of the small business financing market: government-guaranteed lending. This explainer looks at two final rules and two proposed rules that make changes to SBA’s business loan programs.

A common thread runs through these rules: SBA’s desire to expand access to capital for communities and demographic groups that, by many measures, have been historically underserved when it comes to small business credit. In the changes to the Community Advantage program that took effect in May 2022, for example, SBA cited its objective to “encourage increased lending in historically underserved markets.” In its final rule, effective August 2022, on regulatory reform in lending programs, SBA said it expected the changes to “encourage Lenders to make loans that they would not otherwise make, thereby increasing the availability to small businesses of needed credit.” In its November proposed rule to lift the Small Business Lending Company (SBLC) moratorium, SBA cited its “goal of expanding capital opportunities for underserved businesses.”


In its original enabling legislation from 1953, SBA was authorized to provide and guarantee loans to small businesses, provided that “the financial assistance applied for is not otherwise available on reasonable terms and all loans made shall be of such sound value or so secured as reasonably to assure repayment.” There are three core elements embedded in this authorization that have for nearly 70 years provided the foundation of SBA’s lending support programs, especially its flagship program, the 7(a) loan guaranty.

First, government support for small business lending should not be a substitute for what could or would be found in the market. An SBA loan guaranty should be reserved for small businesses that cannot find “reasonable” credit from other sources—it’s not meant to subsidize loans that would be made anyway nor to displace private lending. Second, loans supported by the federal government must be of “sound value” or secured; government-guaranteed lending was not designed to ignore credit quality or collateral. Lending decisions must still be prudent. Lastly, SBA expects loan repayment—these are not grants.

There is some inherent tension among these core elements. Expanding access to credit for small businesses who cannot “otherwise” get it implies that government support will potentially be directed toward small businesses that are newer, operate in industry sectors with high failure rates, have lower credit, or don’t have sufficient collateral. At the same time, the emphasis on “sound value” and repayment places a limit on how far down the credit quality stack the government—and therefore subsidized lenders—can go.

7(a) Loan Guaranty: A Very Brief Primer

In fiscal year (FY) 2022, SBA approved 47,000 7(a)-backed loans, totaling $25.6 billion. For context, it’s estimated that every year depository and non-depository lenders originate a few hundred billion dollars of new credit to small businesses.

Participating 7(a) lenders assess whether small business loan applications are strong enough to warrant a traditional loan or have some weaknesses that require a guaranty.ix As loans needing the guaranty are presumed to be higher risk, the lender is assured that if the borrower defaults, it will not face a loss. Lenders with “delegated” authority can make credit decisions regarding the guaranty without prior SBA review.

Costs for administering the 7(a) guaranty program are covered through fees charged to lenders, both upfront and ongoing. Lenders may also charge fees to loan applicants. One goal of the 7(a) program—shared by both SBA and Congress—is to “achieve a zero-subsidy rate,” meaning that fees and “recoveries of collateral on purchased (defaulted) loans” forestall the need for appropriations. This does not always happen. In the 16 years from FY2007 through FY2022, an appropriation was required in six of the years. Since 2007, the average 7(a)-backed loan has grown larger in size as the relative number of small loans (those under $150,000) has shrunk, as shown in the nearby charts.

Trends in the private sector have followed a slightly different course. Among depository lenders, the smallest of small business loans (those under $100,000) have risen as a share of the number and value of overall small business loans. In the mid-1990s, according to data from the Federal Deposit Insurance Corporation (FDIC), these smallest loans accounted for 88% of the number and 40% of the value of all small business loans from depository institutions. By 2022, those shares had increased to 95% and 47%, respectively.

Community Advantage Pilot Program

Community Advantage is a sub-program within the 7(a) program that, since its inception in 2011, has been in a pilot phase. The purpose of Community Advantage is “to meet the credit, management, and technical assistance needs of small businesses located in underserved low- and moderate-income communities.” Pursuant to this objective, so-called mission lenders can participate in the 7(a) program through Community Advantage. This includes Community Development Financial Institutions (CDFIs). In addition to loans, Community Advantage lenders provide management and technical assistance to small businesses.

Since 2015, the average Community Advantage loan has been around $136,000. For the past decade, Community Advantage lenders have been permitted to charge higher interest rates. On average, interest rates on Community Advantage loans have been about two hundred basis points higher than those made through the Preferred Lender Program (PLP), which accounts for the majority of “regular” 7(a) loans. Lenders in the program are required to make a majority of their SBA-guaranteed loans in underserved markets.

Underserved Small Business Borrowers

A principal justification given by SBA for its final and proposed rules is expansion of credit access to “underserved markets.” This includes small businesses owned by women, business owners of color, and small businesses seeking small loans.

Mission lenders in the Community Advantage program, true to its purpose, have been able to diversify lending to business owners of color and women. In FY2022, for example, Black business owners received four percent of the overall approved amount of 7(a)-backed loans, compared to 20% in Community Advantage. Similar differences are seen when looking at gender. Small businesses with female owners—whether that ownership share is above or below 50%—receive a larger share of SBA-backed loans and lending amounts in Community Advantage than the main 7(a) program.

Read Next

Here, we review SBA’s effective and proposed rules, their empirical bases, and the anticipated impact they might have for small businesses.

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