What Cuts and Changes at the SBA Could Mean for Cities

Since 2016, Jesus Flores has gone to work every day, financing the Brooklyn we’re all afraid of losing.

Beauty salons, local fashion boutiques, bodegas, independent grocery stores, local restaurants and bars. There’s hardly a commercial corridor in Brooklyn that doesn’t have at least one small business financed by Brooklyn Cooperative Federal Credit Union, where Flores is director of business services. A majority of Brooklyn Cooperative’s members are Black, Hispanic, or Asian, and more than 60% of its lending goes to low- or moderate-income census tracts.

Brooklyn Cooperative is tiny, at just $54 million in assets. The loans it makes are very small relative to other institutions, but it makes so many small business loans that it punches above its weight as one of the most active small business lenders across all of New York City.

But now, announced staffing cuts and other changes to the U.S. Small Business Administration are threatening to undermine the work of Flores and his colleagues at Brooklyn Cooperative. In early March, shortly after her Senate confirmation, new SBA Administrator Kelly Loeffler announced her agency was closing six regional offices in sanctuary cities — New York, Chicago, Denver, Atlanta, Boston and Seattle. Later in March, the agency announced plans to cut 43% of its staff.

“​​If they were to remove the office in New York City, the one downtown, man, you know that that’s definitely a big blow,” Flores says. “Being a sanctuary city should not dictate whether you have an SBA office.”

How the SBA Supports Lenders and Their Communities

The SBA supports small business lenders like Brooklyn Cooperative Federal Credit Union in multiple ways. One of the most important, and by far the largest and widest reaching, is through the SBA 7(a) loan guaranty program. Under this program, rather than the SBA itself making the loans, private lenders originate loans and the SBA offers to repay a portion of a small business loan — from 50% to as much as 85% of the original loan amount — in case the borrower defaults. It’s called a loan guarantee.

Across the entire country, the 7(a) program supported more than 70,000 small business loans in 2024 — its highest one-year total yet. There’s hardly a commercial corridor across the country that the program doesn’t touch. There are SBA loans in all 50 states, every congressional district, 60% of counties and 60% of zip codes, according to Next City’s analysis of SBA lending data. Restaurants were the most popular business category, accounting for more than 5,500 7(a) loans in 2024. Other popular 7(a) categories included residential remodeling, landscaping, plumbers, heating and air conditioning contractors, independent truckers, beauty salons and car repair shops.

Founded in 2001, Brooklyn Cooperative noticed early on that many members would take out personal loans to support their businesses. The personal loans were unsecured, meaning no collateral. It sounds risky, which it is, but credit unions are able to manage that risk using relationship-based or character-based lending. But there’s only so much in unsecured loans a credit union can hold in its portfolio, and members needed more.

That’s where the 7(a) program came in for Brooklyn Cooperative. By providing a loan guarantee, the SBA shares some of the risk with the lender, allowing the lender to make many more small business loans than it might otherwise.

“The SBA does not approve the loans, the lender approves the loans,” Flores says. “The lenders, we filter out who qualifies and who doesn’t qualify,” Flores says. “We have strict rules we gotta follow and we follow them to a T.”

The 7(a) loan guarantee effectively serves as collateral for Brooklyn Cooperative Federal Credit Union, which mostly serves populations who don’t have any collateral. This is Brooklyn and New York City, after all, where a majority of the population is renters, even more so for the low- and moderate-income members whom Brooklyn Cooperative serves.

“Say I want to make a $100,000 loan for a small business, asking that business owner to put up $50,000 in collateral,” Flores says. “It makes no sense to do that, but if you have the SBA, you don’t have to make that business put up that collateral. You have as collateral the guarantee from the SBA.”

Since 2010, Brooklyn Cooperative Federal Credit Union has made more 7(a) loans in Brooklyn than Wells Fargo, Bank of America and Citibank combined, according to a Next City review of SBA lending data. Ranked by number of 7(a) loans since 2010, Brooklyn Cooperative is fourth in Brooklyn, behind only TD Bank, Chase and M&T Bank. Brooklyn Cooperative currently has around 50 active 7(a) loans in its portfolio. The average 7(a) loan from Brooklyn Cooperative in 2024 was $29,000, compared to $139,000 for TD Bank or $203,000 for Chase.

Keeping Local Business Local

The 7(a) program is also helpful in many situations where a small business might be at risk of closing because the owner wants to retire or sell the business. Currently a business development officer with Truliant Federal Credit Union, Mary Soldano has been making 7(a) loans in the Philly metropolitan area since 2019. Some of her favorite 7(a) loans have been those where a key employee of a local business acquires it from the longtime previous owner.

Just last summer, an opportunity came across Soldano’s desk where a business owner wanted to sell their business to one of their employees, a woman who had been working in the business, running day-to-day operations since 2014. But the woman didn’t have enough cash for a down payment to buy the business and still have some working capital to keep the business running smoothly after acquiring it.

“We said [to her] you have sweat equity of 10 years in this business,” Soldano said. “[With a 7(a) loan guarantee] we were able to get the deal done with her not putting anything down. That’s where the 7(a) program is really creating these paths to sustainability and ownership for folks who don’t have a million dollars in the bank, but they put their blood, sweat and tears into a small business.”

Nearly one in 10 7(a) loans in 2024 involved a change in ownership. Soldano says around nine out of 10 7(a) loans she does these days involve changes in ownership. Without the 7(a) program, the only option for local business owners to sell or retire might be to sell to a larger competitor or a private equity fund that might lay off employees or move a business to another location far away from the community where it’s been a reliable employer.

“The hardest thing in a business acquisition is whether somebody can come in and run this business,” Soldano says. “Like, do they know the ins-and-outs of it? Do they know the people? That’s the biggest risk. If you’re taking a key manager and that person’s buying the business, that risk is definitely mitigated by that individual. Just because they may not have a million dollars in the bank, that doesn’t mean that they’re not qualified to buy the small business. They may have been in this industry for 30 years. They know how to run a [profit-and-loss statement]. They know how to run the back office operations. But they’ve never been given the opportunity to save that kind of money.”

What Threatened Cuts and Office Closings Could Mean for Cities

It’s not totally clear yet how the announced cuts and changes at the Small Business Administration might affect lenders like Brooklyn Cooperative, Truliant or the businesses and communities they serve.

At Brooklyn Cooperative, Flores is deeply concerned about outreach becoming more difficult, leading to fewer loans made. He’s aiming for his team to make around 50 new 7(a) loans this year, totaling about $1 million. Without a New York City regional SBA office, he’s not sure they’ll hit that goal. Flores says the New York SBA regional office has been a key partner for marketing and outreach to small business owners who aren’t yet members of his credit union.

Unlike its much larger peers, Brooklyn Cooperative doesn’t have a massive marketing budget. It’s well-known among the city’s community development corporations and other community-based organizations, as well as the NYC Department of Small Business Services, all of which have been steady sources sending new clients to Brooklyn Cooperative. But SBA events hosted by the New York regional office have continued to be another consistent source of new clients for Flores and his team.

“Outreach will definitely be harder,” Flores says. “It’s gonna fall on us, a small institution like ourselves, who have a limited staff to be able to do both the underwriting and the outreach. It’s going to put a damper on for sure.”

In addition to making connections with new clients, Flores is concerned about losing chances to connect in person with other SBA lenders. The SBA regional office regularly holds convenings of SBA lenders to discuss changes and updates to 7(a) program rules, or for more experienced lenders like Brooklyn Cooperative to share knowledge and experiences with newer SBA lenders.

Lenders often end up referring clients to each other when, for any number of reasons, they might not be able to help a particular client at that moment in time. Those discussions are much more productive to get started in person rather than over email or even by phone. Flores is concerned these in-person gatherings will be less frequent without the SBA’s New York regional office to host them.

“There was another lender who couldn’t do any more transportation loans, like for Uber or Lyft drivers to purchase vehicles for their work, so she referred a client to me. And anything I can’t do, hopefully they can do, and I refer them out there,” Flores says. “So that circle of lenders, when you have these gatherings, it matters a lot.”

Even with an announced workforce reduction goal of 43% — which may not be legally possible — staffing cuts at the SBA are hard to suss out for how that will impact lenders and their communities. The involvement of SBA staff in the 7(a) lending process varies widely depending on the loan.

Around 55% of 7(a) loans in 2024 were made by SBA-designated “preferred lenders,” meaning the SBA has vetted the institution’s lending track record and deemed it capable of internally approving 7(a) loans up to the program’s maximum of $5 million. SBA employees have very little to do in the day-to-day process with 7(a) loans made by preferred lenders. Each preferred lender approves the loans without any review from the SBA itself. About a third of SBA lenders have preferred lender status, including Soldano’s Truliant Federal Credit Union, which is why Soldano doesn’t anticipate 43% SBA staffing cuts slowing down her team’s ability to continue making 7(a) loans.

Another 37% of 7(a) loans are made using the SBA’s express lending rules. For these, the guarantee is limited to 50% for small business loans up to $500,000. Under the 7(a) express lending rules, lenders approve 7(a) loans internally without SBA staff review. Nearly all of Brooklyn Cooperative’s 7(a) loans are approved under the SBA’s express lending rules.

That leaves about 8%, or 5,600 of all 7(a) loans across the country in 2024 that required SBA staff review for approval. Since 2010, around 113,000 out of 835,500 SBA loans (15%) have required SBA staff review for approval, according to Next City’s analysis of SBA lending data. It’s that 15% of 7(a) loans that are most at risk of being slowed down as a result of staffing cuts across the SBA.

Progress Potentially Stalled

Previously, lenders could make 7(a) loans to any citizen or lawful permanent resident — which includes refugees and individuals granted asylum in the United States. In addition to closing regional offices in six sanctuary cities, the SBA announced it was introducing new citizenship requirements for its 7(a) program and the smaller but also important 504 loan guarantee program, which supports commercial real estate and equipment loans for small businesses.

In announcing these changes, SBA Administrator Loeffler made unsubstantiated claims implying that the agency had been supporting illegal aliens with U.S. taxpayer dollars.

“It’s kind of bonkers,” Flores says. “If you go to any seminar you attend for SBA lenders, we always make that known, you have to be at bare minimum a green card holder.”

Flores has taken multiple 7(a) borrowers through the existing verification process, which involves sending work authorization paperwork and signed statements to U.S. Citizenship and Immigration Services for verification of permanent residency, refugee or asylee status. He’s now expecting that process to change and potentially become more onerous, while losing the ability to provide 7(a) loans for lawful permanent residents.

For Brooklyn Cooperative’s clients, at least, Flores won’t have to turn away any lawful permanent residents who might need a small business loan. Last year, in response to member needs, Brooklyn Cooperative created its own internal loan guarantee program to serve those who, for one reason or another, including immigration status, don’t qualify for the 7(a) program. But not every lender has the ability and the willingness to do that.

In the medium and long-term, staffing cuts at the SBA could slow down the entry of new lenders into the 7(a) program. Approving new lenders for the 7(a) program and training new 7(a) lenders is a big function of SBA staff that could take a hit with major staffing reductions and closings of regional offices.

“It’s less that staff at SBA are needed to approve every loan,” says Brett Theodos, senior fellow at the Urban Institute, a nonpartisan think tank in D.C. “It’s more that staff at SBA are needed to set up technology systems, oversee approval of new SBA lenders, institute changes in response to the evolving economy, and to do compliance and monitoring work.”

Slowing down the expansion of the 7(a) program could slow down the 7(a) program’s recent progress in reaching populations it has historically not been able to reach.

The 7(a) program depends on private lenders to make loans. Most SBA lenders are regulated financial institutions, meaning federally-insured banks and credit unions. But 97% of banks and 87% of credit unions are white-owned or white-led institutions. While there are many other factors also at play, those demographics have historically corresponded with who has had access to 7(a) loans. In 2020, at the beginning of the Biden-Harris Administration, just 3.5% of 7(a) loans went to Black business owners and just 7.8% went to Hispanic business owners.

There has been some progress boosting those numbers. In 2023, Black borrowers got 7.3% of 7(a) loans while Hispanic borrowers got 12.2% of them. At least some of that progress can be traced to the entry of new lenders whose ownership or leadership reflects the demographics of those populations, hinting at different outreach strategies and underwriting capabilities that are a better fit for Black or Hispanic communities. Lendistry, a Black-led online lender, joined the 7(a) program in 2022 and earned 7(a) preferred lender status in 2023. Ponce Bank, the only Hispanic-led bank in New York City, just started making its first 7(a) loans in 2024.

Fewer new lenders entering the 7(a) program could mean stalling the progress made in bringing the 7(a) program to more Black and Hispanic business owners by bringing more Black and Hispanic-led lenders into the 7(a) program.

“Those numbers speak for themselves,” Flores says. “[SBA workforce reductions] could mean fewer institutions being able to get their license to become an SBA lender.”