Banking & Finance

New Hanover County Scores Well On SBA Repayment, New Report Shows

By Jenny Callison, posted Mar 26, 2024
Using SBA historical data, Lumos Technologies mapped the SBA default rate for the U.S. (Image courtesy of Lumos Technologies)
A Wilmington-based financial technology firm has dug deep into Small Business Administration data to help lenders better assess a potential borrower’s risk factors.
Lumos Technologies Inc. has just published a report showing, county by county across the United States, default rates on SBA loans. This region’s lenders should take heart: the area’s borrowers almost always pay back their loans.
“The concept of Lumos is how can we help banks originate loans more efficiently, getting more bang for their buck or a better return on their investment of time, especially with smaller dollar loans,” Lumos CEO Brett Caines said Friday.
The firm looked at SBA loan default rates from 2015 to 2023. In that period, Caines said, New Hanover County’s average rate was 1.1%, placing the county among the top-performing counties in the nation.
“Over that same period, all of North Carolina had an average default rate of 2.1%, the lowest rate among its neighbors: Virginia, South Carolina and Tennessee,” he added. “We chose that eight-year period because we were coming out of the Great Recession and things started looking really solid again.”
In addition to filtering available data by geography, Lumos has gathered small business default rates by industry and by franchise brands.
How does Lumos use this data to help its clients, which are financial institutions?
“In two ways,” Caines said. “One, we want to help banks . . . be more efficient [in their lending processes]. Two, we use this historical data set, which we believe is unique, to build predictive models.”
Using machine learning to train those predictive models, based on the characteristics of a loan, the model can predict the likelihood of a borrower’s default within the next 12 months. Lumos overlays that data set with the default rate in different economic environments and builds correlations of loan performance in different macroeconomic scenarios.
Simply put, according to Caines, the Lumos team tries to help a potential lender see what happens to a potential loan payback under different conditions.
This kind of information is especially helpful for lenders who are considering smaller SBA loans: say, $350,000 or less, compared to a more typical SBA loan of $1 million or more.
“Smaller loans are much more risky,” Caines said. “In stressful times, that difference in risk increases even more. Smaller businesses default at a higher rate. Not only are the smaller dollar loans more risky; smaller loans take the same amount of time and resources to originate. They cost lenders about the same amount to originate and they carry more risk, so banks historically have shied away from smaller dollar loans.”
The SBA realizes that, because of the risk these smaller loans carry, its programs are not reaching small businesses that could significantly benefit from them. It’s taking steps to sweeten the deal for lenders. Live Oak Bank, the nation’s largest SBA lender, pointed to the changes in its Q4 earnings call in January.

“Historically, the SBA had its banks charge an origination fee and a 55-basis-point trail on each loan to fund the program,” Live Oak Chairman and CEO James “Chip” Mahan said during the call. “Under the revised plan, the origination fees on all loans under $1 million have been eliminated. And on loans under $500,000, all collateral requirements have been waived.”

Mahan mentioned several revisions to the 7(a) program, including allowing lenders to use their own underwriting standards, the same ones they apply for non-SBA loans. Another change: for loans under $150,000, the government guarantee has increased from 75% to 85%. The SBA has also simplified the underwriting requirements for loan applications for less than $500,000 and collateral requirements have been reduced as well.

The SBA for years has encouraged lenders to focus on smaller-dollar loans, but until lenders could better gauge their risk, most lenders were reluctant to take a chance.

“Beyond verbal encouragement, there has not been a lot of incentive [for lenders to do so],” Caines said. “But when the SBA changed some underwriting rules and fee structure and took a really great step – taking action behind encouraging words – it [potentially] makes small lending less economically prohibitive.
“Loan origination systems are starting to focus more on small business lending; banks are looking at it,” he added. “[They are purchasing] products like we offer, which are favorable from a small business lending standpoint.
“Community banks perform well when they are in a thriving community,” Caines continued. “What better way to promote a thriving community than to focus on the smallest of small businesses? It’s almost a circular self-fulfilling prophecy. It makes all the sense in the world.”
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