Inc,—Federally-backed loans doled out by small-business lending companies have defaulted at a substantially higher rate compared to traditional lenders over the last decade, according to a new report from the Small Business Administration’s Inspector General.
The new report takes a look at $9.5 billion worth of SBA 7(a) loans—which are government-backed loans with favorable interest and repayment terms—that were disbursed by SBLCs between fiscal year 2016 to 2023. By the end of March 2025, 1,657 loans defaulted and $1.3 billion worth of loans were headed to liquidation.
The default rate of SBLCs hit 14.87 percent through the end of March 2025, compared to 9.79 percent for traditional lenders, according to the report. Even worse, early default rates were more than double (5.38 percent) that of traditional 7(a) lenders (2.62 percent).
Here’s the catch: Poor loan performance is heavily concentrated among two SBLCs, which held 84 percent of the total amount of defaulted loans. The SBA was aware of past infractions committed by these two SBLCs, the report states, but failed to intervene to temper the risks of the underperforming loans.
“This occurred because [Office of Credit Risk Management] did not sufficiently assess the root cause of SBLCs’ 7(a) loan portfolio underperformance, related to default rates, to mitigate the associated risks,” the Inspector General’s office writes in the report, further recommending that the agency conduct its own analysis to figure out the root cause.
To put it differently, SBLC lending grew between fiscal years 2016 to 2023—with loan volumes spiking by 171 percent—but loans also went south more quickly, with the number of early defaults increasing by 800 percent during that same time period.
The SBA says that the above statement, while true, is misleading and instead argues that a more apt portrayal is comparing early default rates to loan disbursements for each fiscal year. That comparison alters the early default count substantially, showing that it increased by 112.5 percent, which the agency acknowledges “is still elevated.”
Despite the SBA identifying actions in need of remediation, the two SBLCs reportedly continued improper business practices, such as charging prohibited fees on loans or failing to make sure that borrowers used funding in adherence to SBA rules. The agency did not name any of the SBLCs within the report.
The SBA also stopped examining SBLCs since April 4, 2023 because of “contractual issues.” About a week later, the SBA had lifted a near 40-year moratorium on its SBLC licensing program to allow more non-bank lenders into the fold. It has not conducted an exam since.
While the agency’s Office of Credit Risk Management isn’t formally required to conduct these exams, not doing so could increase noncompliance risks, the report argues. That, in turn, “could jeopardize the integrity of the program and increase the risk of financial loss.”
“I was sort of appalled by the deficiencies that they noted because it’s just sloppiness,” says Chris Hurn, the CEO and co-founder of Lendesca, an SBA lender service provider. “There’s really no excuse for some of these things.”
Hurn, who was formerly the CEO of Fountainhead, an SBLC, says that the report surprised him, comparing the two poor-performing SBLCs to a couple of bad apples that the agency “didn’t do much about for a long time.” It makes the other SBLCs look bad by comparison, Hurn adds.
And there are consequences that could come about as a result of the report, especially as SBA Administrator Kelly Loeffler has voiced concerns about the health of the 7(a) portfolio. One possibility, Hurn says, is that some SBLCs might reduce their SBA originations as a result of exams. But overall, he maintains that the majority of SBLCs are operating in the black and continue to help alleviate access to capital gaps faced by entrepreneurs.
The SBA agrees, highlighting in its response to the report that SBLC default rates are heavily concentrated. When removing the two SBLCs in question, the remaining majority outperformed traditional 7(a) lenders.
“While the [Office of Credit Risk Management] largely disagrees with the draft report, it acknowledges opportunities to strengthen oversight activities,” the SBA’s Edward Ledford, who serves as the OCRM deputy director, wrote in response.
