Small-business loan servicer pivots away from PPP

Small-business loan servicer pivots away from PPP
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Newity, which was set up to buy paycheck protection program loans and service its loans, always knew it would have to focus its business model once the PPP business began to wane.

She is now launching the Small Business Administration 7(a) project nationwide. The company began building an online lending platform in May — the same month that PPP lending stopped — and recently launched a pilot program that provided small $7(a) loans to about 80 borrowers. On Thursday, Newity unveiled Lending 7(a) outlet to the broader market.

“We believe that if we can demonstrate that we can convert loans in two weeks or less … that will be very powerful,” said Luke LaHaie, co-founder and co-CEO of Newity.

The Newity hub 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 would Allow SBA to create and disburse direct loans up to $150,000 — a move that could replace banks and credit unions targeting the same market. The Small Business Administration declined to comment for this story.

Luke Hague (left), co-CEO of Newity, and Rick Wayne, CEO of Northeast Bank. “With the purchase program coming to an end… we started planning for the next phase of work, which always meant 7 loans in our minds,” said Hague.

For Newity, which purchased 115,000 PPP loans totaling $11.3 billion from banks Starting in June 2020, 7 (a) Lending has emerged as a second natural act. Like the public-private partnership, Program 7(a) focuses on providing capital to small businesses, offering guarantees on loans of up to $5 million.

“With the purchase program coming to an end… we started planning for the next phase of work, which always meant 7 loans in our minds,” said Hague. He added that 115,000 PPP borrowers Newity has purchased, with the help of Northeast Bank’s $1.4 billion in assets, are central to its strategy to build a nationwide business.

“Small business owners still need capital,” Hague said.

Once it hits its stride, LaHaie said, Newity expects to take out up to 1,000 7(a) loans per month. If you get close to hitting that goal, Newity will quickly rise to the top of the Seven A lenders by number of loans.

By comparison, Columbus, Ohio-based Huntington Banks, the largest 7(a) lender in the United States, closed 653 loans between October 1 and December 9, valued at $174 billion, according to the Federation of Business Administration. During fiscal year 2021, which ended September 30, Huntington closed 7,366(a) loans.

Northeast continues to work with Newity, providing its capital and balance sheet to support the company’s lending ambitions at SBA. The bank, which has created $3.3 billion in public-private partnership loans and has taken about $31 million in fees so far by providing Newity’s messaging services, is awash with capital to get it working, according to Northeast CEO Rick Wayne.

“We have about $240 million in Tier 1 capital, which is enough to double the size of our loan book,” Wayne said.

While Newity wants to offer large loans of up to $350,000 eventually, it is currently focusing on the market for loans of between $18,000 and $25,000, which both LaHaie and Wayne claim are underserved.

“A lot of the banks don’t want to do these small loans,” Wayne said. “There are a lot of points to pay attention to.”

Today the market is served by merchant cash advances and credit cards — “really expensive things,” Hague said.

Initially, Newity will market within its group of PPP borrowers.

“We think that’s a huge advantage,” Wayne said. “We have all the information about them because we are already their lender. … If you try to find these borrowers nationally, the customer acquisition costs can be very high.”

At the same time, Newity plans to add to its customer base by soliciting referrals from banks. As Newity and Northeast are more willing to limit their contact to borrowers referred to make a 7(a) loan, LaHaie expects lenders to be willing to refer their clients.

“For most banks, are they really going to build a whole technology group and team… for these small dollar loans? We don’t think so,” Hague 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 $2.6 billion unit of Gulf Coast Bank and Trust in New Orleans, said the 7(a) microloan market is disadvantaged by banks, giving Newity’s plans an air of plausibility.

However, Bob Coleman, editor of the Coleman Report and a longtime expert at the SBA, said a number of other companies have sought to build businesses based on referrals from banks and other lenders, but it has fallen short.

“I’m not saying it can’t be done, but I’ve never seen this model work,” Coleman said.


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