How Can Credit Unions Get Their Piece of the SBA Lending Pie?

SBA lending is a compelling, but underused resource for credit unions looking to grow their share of the lucrative business services pie. These government-guaranteed loans can be a great way for cooperatives to develop a profitable and sustainable small business services program that both meets the funding needs of business members and provides a low-risk source of incremental new interest income.

Just as critically, there is a natural alignment between the founding mission of credit unions – serving the underserved – and the primary objective of the U.S. Small Business Administration (SBA) to provide needed capital to those businesses underserved by our country’s financial system. For this reason alone, cooperatives have a responsibility to lead the way in SBA lending.

But SBA lending comes with its share of challenges, and credit unions must be careful not to bite off more than they can chew.

In this third and final article of our series on developing a more effective business services program (read part one here and two here), we discuss how credit unions can make the most of the SBA lending opportunity.

The SBA Lending Opportunity for Credit Unions

For credit unions looking to expand their foothold in the small business market, loans guaranteed by the SBA make a lot of sense.

First, SBA loans complement a well-constructed small business services program, enabling credit unions to gain a foot in the door with newly formed and growing businesses right in their local community.

SBA loans are also an ideal way to grow business deposits, providing low-cost capital that can be lent out to other members. And because they offer government guarantees, SBA loans represent a relatively safe, lower-risk way to grow a commercial loan portfolio and earn incremental interest income.

Just as importantly, SBA lending offers numerous opportunities for positive PR and community exposure through partnerships with nonprofits and economic development organizations like the Chamber of Commerce, not to mention participation in grand openings and ribbon cutting events.

Lastly, the credit union philosophy of “people helping people” fits SBA lending like a glove, as it is a program designed to serve Main Street – instead of Wall Street – businesses. As national and community banks abandon small businesses to focus on other priorities and the demands of their shareholders, they are creating ample room for credit unions to jump in and grab their piece of the pie.

Many cooperatives have made the most of this opportunity. Since 2014, credit union SBA loan portfolios have nearly tripled, from $1.33 billion to $3.74 billion (as of the quarter ending September 2024)

Yet despite this growth, credit unions still originate only a tiny slice of all SBA loans across the country – roughly 2.7% as of the last fiscal year. This demonstrates that there is still a lot of room at the SBA lending table for cooperatives.

What Are SBA Loans?

SBA-guaranteed loans offer both lenders and borrowers several advantages not available through conventional commercial and small business loans.

On the borrower’s side, SBA loans provide small businesses with much-needed capital that may be unavailable through traditional financing. They also allow credit unions to offer more flexible lending structures, like longer loan terms and smaller down payments, that can help businesses that don’t meet a lender’s conventional credit guidelines to maintain adequate business cash flow and achieve sustainable borrowing ratios.

Lenders also receive significant benefits, the most obvious being a government guarantee ranging from 50% to 90%, depending on the specific program guidelines.

The SBA offers a wide range of loan programs. Among the most popular are:

7(a) Loans: This is the SBA’s flagship loan program, offering borrowing amounts of $500,000 to $5,000,000 and a 75% loan guarantee.
7(a) Small Loans: The SBA also offers smaller-dollar loans for amounts under $500,000, with guarantees of 75% or 85%.
Express: If a faster turnaround is required, lenders can offer qualified borrowers with loans up to $500,000 with a 50% guarantee.
504 Loans: This program offers loans up to $5,000,000, but requires participation with a Certified Development Company (CDC).

Regardless of the specific program, the lender’s risk of loss is significantly reduced, allowing credit unions to serve borrowers that may be slightly outside of their organization’s risk tolerance guidelines for conventional loans. In addition, credit unions have the opportunity to generate immediate non-interest income returns by selling the guaranteed portions of their SBA loans on the secondary market.

Barriers to SBA Lending Success

Despite these numerous benefits, SBA lending does present some unique challenges. The SBA’s loan process can be complex and difficult to navigate, especially for lenders without access to experienced, knowledgeable experts.

Strict documentation: The SBA requires borrowers and lending institutions to complete detailed, custom applications and provide documentation above and beyond that required for conventional loans.
Specific underwriting criteria: To receive approval, borrowers must meet strict qualification guidelines.
Active monitoring and reporting requirements: The SBA requires lenders to report active loan data monthly via its 1502 report, pay monthly loan servicing fees as required, and regularly monitor all borrowers for compliance with existing commercial loan policy requirements. In addition, the agency requires lenders to conduct annual reviews with updated risk ratings and perform regular site visits on each loan in the same manner as on non-SBA commercial loans.
Risk of loss of guarantee: In addition to the standard credit, collateral, interest rate and concentration risks inherent to conventional business loans, SBA lenders must adhere to strict documentation, underwriting and borrower eligibility guidelines to reduce the risk of losing the guarantee.
Technology needs: Although credit unions can choose to manage their SBA portfolio manually, it becomes increasingly cumbersome as the portfolio grows. Required reporting, monitoring, underwriting and monthly loan servicing is best achieved using specialized technology solutions designed for these purposes.

Buy, Build or Partner?

To offset these challenges, credit unions must have access to staff with expertise and experience in SBA lending. But such talent is hard to find. Credit unions considering getting into SBA lending often choose one of two paths: They can hire experienced SBA loan officers and underwriters from the outside or invest in training in-house staff to originate and underwrite these unique loans.

But either of these paths can be cost-prohibitive and risky. Salary and benefits for an experienced SBA loan officer can easily be six figures. And training junior staff to originate and underwrite SBA loans takes time and significant internal and external resources. Just as concerning, inexperienced SBA lenders face a steep learning curve early in their careers. Once fully trained and with a few years of experience under their belt, these newly minted SBA experts may elect to take their talents elsewhere.

Even with the right structure, experienced staff and sufficient resources at your disposal, SBA lending is time consuming and paper intensive. The risk of a single mistake in documentation or loan monitoring can result in the loss of the entire loan guarantee.

Choosing the Partnership Path for SBA Lending

Fortunately, credit unions have a third option – partnering with an experienced, expert third party to help manage their SBA lending program – which can reduce program risk and expense significantly. Such firms offer the right systems, expertise and tools to allow credit unions to focus on what they do best – serving their members’ (and business members’!) needs.

When assessing potential partners, be sure to choose one with the ability to support your SBA program across all four stages: Planning, starting, expanding and advancing. Look for a partner that gives you access to a team of trusted and knowledgeable government-guaranteed lending experts to ensure your program is in full compliance with all SBA documentation, underwriting and reporting requirements.

With help from an experienced industry partner, your credit union can confidently begin offering SBA loans to qualified borrowers. This will enable you to cultivate an additional revenue stream to diversify and enhance your business services line, all while developing expertise within your own team as your SBA portfolio grows over time. Best of all, you’ll be providing needed funding to small businesses right in your community.

By choosing this third path, you will be set up for business services success, allowing your credit union to have your pie – and eat it, too!