Decoding SBA’s Lending Reforms for Disadvantaged Small Businesses
The US SBA is giving small businesses operating in low-income and rural areas a boost when it comes to lending, as it has announced reforms to its Community Advantage (CA) Pilot Program – a lending program designed for 11.2 million small businesses in economically disadvantaged zones.
These small businesses especially suffered during the height of the pandemic, as more than 500,000 of them were forced to shut their doors, displacing millions of workers in low-income and rural communities.
The SBA’s CA program was launched in 2019 to encourage Community Financial Development Institutions – lenders specializing in supporting small businesses in economically disadvantaged communities – and other participating lenders to lend up to $25,000 in unsecured loans and offered lending levels of up to $250,000. The program was set to expire in September 2022, and a four-year moratorium on new lender applicants was set in place.
According to a joint announcement from the SBA and the Biden Administration, the new reforms to the program include:
- Extending the program to September 30, 2024.
- Lift the four-year moratorium on new lender applicants to increase the amount of capital being offered by the program.
- Allow participating lenders access to the SBA’s popular 7(a) loan government-guaranteed loan program at lending levels up to $350,000 from $250,000.
- Allow small business owners with criminal backgrounds to apply for funding through the program.
- Ease collateral requirements for borrowers and increase the maximum loan size to $35,000 from $25,000.
- Allow participating lenders to offer lines of credit, interest-only periods and other loan modifications.
Which Businesses are Eligible?
The move should help small businesses in low-to-moderate income (LMI) and rural communities that often struggle to find lending. The businesses that are eligible to participate in the program are:
- Low-to-Moderate Income (LMI) communities.
- Businesses where more than 50% of the full-time workers are low-income workers or workers who live in LMI census tracts.
- Empowerment Zones and Enterprise Communities – communities that are identified by the federal government as an areas in which there is a high level of poverty and economic distress where businesses may be eligible for federal grants and tax incentives.
- HUBZones – Areas that are identified by the SBA in which small companies operate and employ workers in historically underutilized business zones.
- Businesses in operation for less than two years, since roughly 20% of small businesses, on average, fail after two years.
- Businesses eligible for SBA Veterans Advantage Program.
- Small businesses in rural areas.
For loans through the CA program, the SBA will provide 85% loan guarantees for up to $150,000, 75% for loans greater than $150,000 and 90% for international trade loans. The maximum interest rate for these 7(a) loans is prime plus 6%, and the turnaround time for getting the loan is five- to 10 business days.
More information on these loans can be found on the SBA’s website.
Reforms to the CA program should benefit pandemic-ravaged small businesses and could boost the US economy. According to the Brookings Institute, small businesses with less than 500 employees are responsible for providing roughly 65% of the jobs in non-metropolitan counties in the US, while small businesses with less than 50 employees account for 42%.
Statistics for small businesses operating in LMI communities are scant, but the SBA released a report in February identifying nearly 6,800 small businesses operating in HUBZones. According to a past report from the Economic Justice Fund, there are 11.2 million small businesses operating in low-income communities. In both rural and low-income communities, small businesses can be a major source of jobs that can lift individuals out of poverty and aid in community development.
Who are the Lenders?
Several different types of lenders can sign up to participate in the SBA’s CA program. The most prolific are community development financial institutions (CDFIs) – lenders that specialize in serving small businesses in economically disadvantaged communities such as LMI neighborhoods and rural areas. According to the Opportunity Finance Network, there are approximately 1,200 CDFIs nationwide that manage over $222 billion in lending to small businesses and new homeowners. These types of lenders must be certified with the US Treasury Dept.
They are not the only lenders, though. Others include microloan program intermediaries, as well as intermediary lending pilot (ILP) program members. Local and regional banks can also register to participate in the program, as well as alternative lenders. Some financial institutions do shy away from participating in lending to businesses in LMI areas given the heightened risk, however.
Lending institutions can register with the SBA to participate in the CA program online. Small businesses that are eligible to participate in the program can find a list of qualified lenders on the SBA’s website.
Don’t Miss Out
If your small business operates in a rural area or underserved community, you’d be well-advised not to miss out by taking advantage of these reforms. As the economy is still feeling the effects of the pandemic, rising inflation and worker shortages, now is probably a great time to seek financing to get you through.