Newity, a company set up to help purchase and service Paycheck Protection Program loans, always knew it would have to pivot its business model once the PPP business began winding down.
He is now launching a national 7(a) small business administration company. The company began building an online lending platform in May – the same month PPP loans ceased – and recently launched a pilot project that provided 7(a) small dollar loans to around 80 borrowers. . On Thursday, Newity unveiled its 7(a) loan gate to the wider market.
“We think if we can prove that we can repay the loans in two weeks or less…that will be very powerful,” said Luke LaHaie, co-founder and co-CEO of Newity.
Newity’s pivot has the potential to put the Chicago-based company, formerly known as ACAP SME, in direct competition with the SBA itself. The Biden administration’s 2020 budget plan includes funding that allow the SBA to originate and disburse direct loans up to $150,000 – a move that could displace banks and credit unions targeting the same market. The SBA declined to comment for this story.
For Newity, which helped buy 115,000 PPP loans totaling $11.3 billion from banks from June 2020, the 7(a) loan market appeared as a natural second act. Like the PPP, the 7(a) program focuses on providing capital to small businesses, offering guarantees on loans up to $5 million.
“At the end of the purchase program … we started planning for the next phase of the business, which in our minds still meant 7(a) loans,” LaHaie said. He added that the 115,000 PPP borrowers whose loans Newity continues to repay are central to its strategy of building a national business.
“Small business owners still need capital,” LaHaie said.
Once it hits its stride, Newity plans to help create up to 1,000 7(a) loans per month, LaHaie said. If it is close to achieving this goal, Newity’s lending partner Northeast Bank, with assets of $1.4 billion, will quickly rise to the top echelon of 7(a) lenders. in terms of number of loans.
By comparison, the $174 billion in assets of Huntington Bancshares in Columbus, Ohio, the nation’s most prolific 7(a) lender, closed 653 loans between Oct. 1 and Dec. 9, according to the SBA. In fiscal 2021, which ended September 30, Huntington closed 4,366 7(a) loans.
Northeast, in Portland, Maine, continues to work with Newity, offering its capital and balance sheet in support of the company’s SBA lending ambitions. The bank, which has issued $3.3 billion in PPP loans and earned about $31 million in fees so far from providing correspondent services to Newity, is rife with capital that needs to be put to work, according to the CEO of Northeast, Rick Wayne.
“We have approximately $240 million in Tier 1 capital, which is enough to double the size of our loan portfolio,” Wayne said.
While Newity and Northeast eventually want to offer loans of up to $350,000, for now they are focused on the $18,000 to $25,000 loan market, which LaHaie and Wayne say is underserved.
“A lot of banks don’t want to make these very small loans,” Wayne said. “There are a lot of i’s to focus on and t’s to cross.”
LaHaie said the market today is served by merchant cash advances and credit cards — “really expensive things.”
Initially, Newity will market within its pool of PPP borrowers.
“We think that’s a big advantage,” Wayne said. “We have all the information on them because we are already their lender. … If you’re trying to find these borrowers nationwide, customer acquisition costs can be very high.
At the same time, Newity intends to expand its customer base by soliciting references from banks. Since Newity and Northeast are more than willing to limit contact with borrowers referred to the provision of a 7(a) loan, LaHaie expects lenders to be willing to refer their clients.
“For most banks, are they really going to build a full technology stack and team… for these small loans? We don’t think so,” LaHaie said. “We think a lot of them will choose to outsource to us.”
Wayne and other SBA bankers, including Nimi Natan, president and CEO of Gulf Coast Small Business Lending, a unit of the $2.6 billion Gulf Coast Bank and Trust in New Orleans, have said the market for small 7(a) loans is underserved by the banks, giving Newity’s plans an air of plausibility.
Still, Bob Coleman, editor of the Coleman Report and longtime SBA expert, said a number of other companies seek to start businesses based on recommendations from banks and other lenders, but they couldn’t.
“I’m not saying it can’t be done, but I’ve never seen this model work,” Coleman said.