Small Business Matters - The SBA: A financing workhorse for small business

The SBA: A financing workhorse for small business  
West Hawaii Today 3/15/2021

In my mind, one of the institutional heroes of our attempt to claw our way out of the pandemic economy has been the Small Business Administration. Although sometimes, deservedly, criticized for bottlenecks or administrative course changes during this crisis, we need to keep in mind the scope of the work this agency took on and the rate at which it moved to come up to speed. It’s an over-used analogy, but there isn’t a better one: in the last year, the SBA truly has been drinking out of a fire hose, a fire hose of funding.

In FY2020 the SBA funneled approximately $3.5 billion of emergency funding to Hawaii’s small business economy. Close to $2.5 billion of that was Paycheck Protection Program (PPP) money and a little over $1 billion was Economic Injury Disaster Loan (EIDL) and EIDL Advance funding. Nationally, those figures totaled $736 billion. To put that into perspective, that is more lending in seven months than the SBA had done in all the 67 years combined since its founding. “The SBA has mobilized the greatest public-private disaster response in modern history,” according to East Coast SBA Administrator Steve Bulger. “The agency built and launched the largest economic response program aimed at small businesses in American history in just six days.” Given the magnitude of that effort, I think they deserve a break, and some gratitude.

The spigot of federal funding continues in FY 2021 with $325 billion approved for various SBA programs in the last days of the previous administration, and an additional $50 billion in funding coming in the current administration’s American Rescue Plan Act. SBA’s cup, and its workload, truly runneth over.

While the SBA’s personnel have been complemented by contract employees during this period of COVID hyper-lending, it is important to recognize that this is a relatively small organization by federal agency standards. Its 2021 budget is $871 million, and it has a staff of approximately 3300. That certainly doesn’t sound “small”, but the keyword here is “relative”. The next largest federal department, the Corps of Engineers has a budget and staff more than ten times larger, and there are 28 agencies larger than that.

The SBA Hawaii-Pacific Islands District Office, which covers Hawaii, Guam, American Samoa, the Northern Marianas, Micronesia, Palau, and the Marshall Islands has a grand total of eight staff. “We care deeply to provide the very best service and commitment to the communities and resource partners we serve across a 12 million square mile district where the SBA day begins in the western Pacific and end in Hawaii,” says SBA District Director Mark Spain. The resource partners he refers to include the Small Business Development Center Network (SBDC), the Patsy Mink Center for Business and Leadership, SCORE, and the Veterans Business Outreach Center. Of these, only the SBDC is present on Hawaii Island.

Although SBA came to the forefront of public consciousness last year with pandemic disaster financing, it is largely known as an important, on-going source for small business loans in situations where commercial banks may hesitate to tread.

Except for the EIDL, the disaster loan product that comes directly from the SBA, the agency operates as a guarantor of funds to financial institutions. This means that while borrowers apply and obtain financing from commercial lending institutions, those institutions can elect to call upon the SBA to participate in the loan. The SBA does this by guaranteeing a significant proportion of the loan amount. The bank is therefore relieved of a large chunk of the risk involved as the SBA would step in to reimburse the bank for their guaranteed portion of a loan should the borrower default.

There are two mainstay SBA loan products for business borrowers. These loans can have longer payment periods than many commercial loans, which make their payments more reasonable than a loan amortized over a shorter period, and they usually have more favorable borrower equity and collateral requirements than commercial loans. The first of these products is the 7(a) loan, the most frequently used loan due to its flexibility. It can be used for working capital, exporting purposes, business acquisition, and lines of credit, among other things. The other main SBA loan is the 504 loan, which is used for purchasing capital assets like land or equipment.

A new entrant into the SBA loan product portfolio for Hawaii is the Micro Loan Program, which provides small loans up to $50,000, but with a “sweet spot” for generally much smaller loans. The Council for Native Hawaiian Advancement recently became the SBA Micro Loan Program lender for the Hawaii-Pacific Islands District see their website for details.

SBA has worked hard to help pull us out of our economic crisis; discuss with your banker if SBA financing might work for your company.

Dennis Boyd
Director of the West Hawaii Small Business Development Center. Hawaii SBDC 
Kona-Kohala Chamber of Commerce Board Member, Chair-Elect