The SBA’s Proposed Rule Change: Lower Fee Cap

Right now the SBA is considering a new rule that would reduce existing fee caps by 50% for some loan facilitators, including referral and packaging services. While lower fees might sound like a good idea, it’s important to remember that those loan facilitators can be crucial to connecting small businesses in need of credit to lenders.

In fact, our small business was one of many that benefited from the expertise, dedication, and commitment of a loan facilitator when we sought financing in 2016.

Loan Facilitators Helped Us Get an SBA Loan

In 2016, our small business sought a loan of $350,000 in order to expand. A recent survey found that 37% of small businesses seeking $350,000 or less were, just like us, turned away by a bank before hiring an agent and successfully obtaining the loan they originally sought.

We spent a great deal of time and effort working directly with a number banks. Some were uninterested in talking with us because they were unfamiliar with our industry (online publishing). Others had business development officers that seemed more focused on their more valuable customers and prospects (those seeking over $1 million) and seemed to have little time and attention for us. The few lenders that were willing to entertain our loan request required round after round of forms (specific to their bank) in addition to our financials, and communication was sporadic. The process was complicated, time consuming, and filled with rejections.

It was only with the assistance of a loan facilitator (SmartBiz) that we were ultimately approved for a loan through the SBA 7(a) program. Working with the loan facilitator was a breath of fresh air. Finally we had a communicative, efficient partner that understood how important this financing was to our business and resolved to find us a lender quickly.

Ultimately, access to that affordable financing has helped us grow from a team of 10 full-time employees to 75 in less than 24 months. Were we to again be faced with the decision to engage an agent to help us obtain an affordable loan, we would happily pay the fees charged for their services. But we worry that the fee caps currently being proposed by the SBA may mean loan facilitators would be unable to afford to help small business like ours in the future.

Small Businesses Seeking Small Loans Are Underserved

We know that our experience is not unique. How? Because not only are we a small business ourselves, with over 2 million monthly readers of FitSmallBusiness.com, we benefit from constant feedback from small business owners nationwide. Frustration when working with traditional lenders is common and frequent.

Their frustration is likely due to encountering fewer banks willing to help truly small businesses obtain SBA funding. In 2000, the number of lenders making a traditional sub-$350,000 SBA loan was over 4,250. Now that number sits only slightly above 1,250. It’s not surprising, then, that 20% of these loans are currently made with assistance from referral and packaging services, who have the resources, knowledge, and ability to connect borrowers to a quickly shrinking group of lenders. Without the help of these intermediaries, it would be impossible for many small and community banks to be able to extend loans to small businesses.

While lower fee caps may seem like a good thing, in all likelihood it will result in more small businesses being turned away for loans. Lower fee caps will likely reduce small business owners’ access to affordable financing that allows them to grow, enter new markets, and create new jobs within their communities.

We agree with many others that the SBA can and should set fee caps to make sure that entities within the market are not taking advantage of unsuspecting small businesses with exorbitant rates. But existing SBA fee caps and market competition among firms already keep fees affordable for the thousands of businesses across the country who apply for a loan, and arbitrarily cutting fee caps even more could create more problems for small business owners.

Right now, the fees SBA allows are 2% for a referral and 2% for packaging that loan. The SBA’s proposed regulations would cut this maximum by 50% or more to a flat 2.5% fee or a maximum of $7,000, whichever is lower. Additionally, the SBA is proposing that agents that represent the small business to refer or package their loan cannot also provide services to lenders.

From our perspective, these two prospective SBA rule changes wouldn’t result in the same number of loans being made but with lower rates. Instead, it would likely result in fewer SBA loans being made to the small businesses that are so integral to our communities. Those businesses who are no longer able to access the affordable SBA loans will likely turn to alternatives with both higher rates and higher fees, limiting their ability to grow and hire as quickly as they would have otherwise.

Bottom Line

We feel that by cutting off any viable way for referral and packaging services to make SBA loans under $350,000, SBA is hurting exactly the kinds of small businesses they should be helping. We know from experience that it would have negatively impacted our own small business, along with our now 75 full-time employees and the numerous contractors and service providers we work with.

You can comment regarding the SBA’s proposed rule change on fee caps here:

• RIN: 3245-AG74
• CFR: 13 CFR Parts 103, 120 and 121
• Federal Register Number: 2018-20869
• Docket ID: SBA-2018-0009