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How The Trump Administration Should Reform SBA Lending To Empower Entrepreneurs

It would only take a few small changes to help make the American dream achievable for more small business owners.

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I had a conversation with an entrepreneur friend this week who was bemoaning the torture of going through a Small Business Administration loan process. As a businessman, this is the kind of guy who has done everything right. He keeps up with his taxes, pays his employees well, stays in compliance with various state inspections, and is active in his community in only the best ways.

He survived the Covid lockdown and other setbacks that were no fault of his own, and actually turned those into an opportunity to help his neighbors. He is the kind of guy you naturally root for, and a credit to any community he would be part of. During our call, he was justifiably upset that after months of filing forms and discussions, the Small Business Administration was putting covenants into his loan that would make it impossible for him to execute. My commiserations were real because, sadly, I have had the same conversation with other clients too many times to count, and I feel like it’s time to address government-backstopped lending as it pertains to entrepreneurs.

The Small Business Administration is a government entity that works with community banks to finance businesses. Provided certain criteria are met, it acts as a guarantor of a significant portion (typically 75 to 80 percent) of a loan. The program was designed to get working capital into the hands of entrepreneurs when they need it most, and at a time when, for whatever reason, conventional financing is off the table.

While it can provide a lifeline for businesses, the covenants are so invasive that many businesses have to forgo the loan because of them. For example, a “standard” 7(a) loan, the most common one, means the lender must fully securitize the loan. That means they need collateral worth the entire value of the loan. This only tells part of the story. I am personally aware of loans failing to fund with collateral three........

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