Why SBA Loans Are a Lot Harder to Obtain After the Great Recession

One of the reasons that (expensive) alternative loans like merchant cash advances became so popular was because banks dramatically reduced their small business lending after the great recession. I spoke to a former CEO of a community bank. He told me when he first started at the bank back in 2006, they would issue loans based on stated income. Originally from Europe, he asked his colleague: What is stated income? It turned out stated income is whatever the income the business owner told the bank. It could be $50K, $100K, $150K or anything seemingly believable. The bank would just take it.

He was shocked, but during the go-go years of real estate, nobody questioned the insanity seriously enough. Then in 2007, the subprime mortgage crisis hit, followed by the prime mortgage crisis in early 2008, the credit default swap crisis in late 2008, etc. The government had to bail out big banks while a bunch of small banks failed. Many business owners had a very tough time maintaining their revenue while the banks tightened their credit policy. The bar became a lot higher for getting any loan, and business loans become extremely hard to obtain.

The following graph shows the number of SBA 7(a) loans by year. As you can see, the number of 7(a) loans peaked in 2007 and dropped dramatically in 2008 and 2009. The number of loans issued in 2009 is only 41.5% of the number in 2007, and has been hovering around 50% of the peak in the past couple of years. The total loan amount did come back and exceeded the pre-recession level . What this means is that banks are issuing a larger number of SBA loans in the past couple of years.