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The second ever multi-lender securitization of unguaranteed portions of US Small Business Administration loans closed in September and another is on the way, as community banks and other SBA lenders tap into institutional investor demand to increase their capacity to lend to mom and pop businesses across the country.
These deals securitize loans that are partly guaranteed through the SBA’s 7(a) loan program, which is designed to help small businesses obtain financing that is not otherwise available.
For investors, these transactions provide exposure to fixtures of Main Street such as diners, nail salons, plumbers and sporting goods stores, while for community banks they bring in funding and free up capital to lend more.
In particular, the new multi-originator deals help to solve a problem faced by smaller SBA lenders — what to do with the unguaranteed portions of SBA loans sitting on their balance sheets, since there is no thriving secondary market to sell them into and individual loan books can be too small to securitize on their own.
“It's an interesting transaction for a small institution that allows us to revolve our balance sheet and revolve our liquidity so that we can provide more assistance to more businesses out there,” said Jeremy Gilpin, chairman of the board at Community Bankshares, which owns Community Bank & Trust – West Georgia (CB&T), one of the participating lenders in the latest multi-lender securitization, SOUP 7(a) Trust 2025-FBC1.
Small portions
Section 7(a) of the Small Business Act of 1953 authorizes the SBA to provide partial guarantees for loans of up to $5m to small businesses that are otherwise unable to access credit.
The guarantee covers up to 75% of the loan and guaranteed portions of SBA loans are already routinely securitized.
But that leaves the 25% unguaranteed portion sitting on the balance sheet of the lender. While larger SBA lenders such as Harvest Small Business Finance have been able to securitize their unguaranteed portions repeatedly, smaller community banks can struggle to put together a large enough pool for a single transaction by themselves.
“Typically, these types of securitizations with the Small Business Administration have been held towards your larger fintechs or lenders that carry a large volume, meaning that they can securitize up to $100m themselves in one tranche,” said Gilpin.
However, smaller lenders like CB&T and their advisors have been working to create a scalable and sustainable way to securitize these non-guaranteed parts into as the demand for SBA 7(a) loans grows.
Two helpings
Falcon Bridge Capital, originally a distressed mortgage investor but now a specialty advisor and asset manager, started to work on a solution in 2019, developing a vehicle for multiple originators to pool their unguaranteed portions of SBA loans for joint securitization.
The first deal from the programme, SOUP 7(a) Trust 2025-FBC1, finally emerged in May 2024 (SOUP stands for Securitization Of Unguaranteed Portions).
The transaction was backed by loans to a wide range of businesses including hotels, computer repair shops, funeral homes, chiropractors, eye doctors, pest control services, car washes, daycares and many more, according to paperwork filed with the Securities and Exchange Commission. The originators are listed as Peoples Bank, Poppy Bank, Millennium Bank, Mission Valley Bank, Lendistry and Community Bank of the Bay.
The follow-up transaction, SOUP 7(a) TRUST 2025-FBC1, closed in October, with loans originated by Lendistry, Millennium Bank and first-time participant CB&T. Guidehouse served as master servicer, custodian and back-up servicer for both deals.
Georgia-based CB&T focuses on lending to rural and underserved markets. “We're a small little bank, but we close a lot of loans, and we use securitizations and participations in order to make it happen,” said Gilpin.
CB&T contributed $36.5m of unguaranteed portions of SBA loans to SOUP 7(a) TRUST 2025-FBC1. The bank has around $291m in total assets and funds approximately $500m in commercial loans a year, according to Gilpin.
Tennessee-based Millennium Bank, which has around $526m in assets, contributed $27m, while California-based Lendistry, a non-bank lender to small businesses and commercial real estate owners, put in $55.4m.
Revealing the recipe
The 2024 transaction, privately rated BBB by S&P, was backed by roughly $94m of unguaranteed portions of around 400 SBA loans, Falcon Bridge told Bob Coleman, the editor of small business lending newsletter the Coleman Report, in an interview.
This year, a public credit rating report from Morningstar DBRS for the second transaction shed more light on the structure.
A single $90.5m class A note, rated BBB by the rating agency, was placed with institutional investors. Credit enhancement was provided mainly by overcollateralization.
The transaction is backed by around $119m of unguaranteed portions of over 1,500 SBA loans. The class A note interest rate is SOFR plus 2.85%.
“It frees up liquidity, and it also does provide a capital increase because you've reduced your risk-weighted assets on your balance sheet as well due to the fact that you've had a significant amount of loans leave the balance sheet for sale,” said Gilpin.
The banks are able to reduce their risk-weighted assets despite holding on to a junior piece of the risk to comply with SBA rules, Dodd-Frank and credit rating requirements. The SBA reviews all lender requests for securitization and establishes a minimum subordinated tranche the lender must hold of the non-guaranteed portion. Generally, the credit rating agency retention requirement is the highest of the three.
But holding the risk-retention piece in the form of a security is an improvement on holding the loans. “From a capital perspective and from a liquidity perspective, it’s beneficial,” said Gilpin.
“We held approximately 7.8% of [our] total outstanding loan balance,” said Gilpin. Community Bank’s total portfolio, including the guaranteed portion, was approximately $154m, and the total including the other lenders was around $590m.
The original lenders retaining servicing on the loans and also earn excess spread, which is accumulated in their respective accounts to either absorb any losses or interest shortfall if they occur, or otherwise as profit.
Simple ingredients
Securitizing pools of loans originated by a range of different lenders adds a level of complexity compared with single-originator transactions.
“You have to find the community institutions that provide just enough volume, but not too much volume, and are sophisticated enough to be able to work through a securitization as well and maintain the servicing,” said Gilpin.
The ratings part is most arduous. Each institution goes through a rigorous risk assessment.
“We spent about eight hours, at least, of interviews, as well as reviewing all of our documentation, policies, procedures and how we handle credit,” said Gilpin.
Including more than three lenders can become increasingly costly and stress the credit rating of the bond because each institution has a different risk management process.
“[Take] everything that would go into a normal credit rating on an institution that is still going to maintain the servicing, but multiply that by three,” said Gilpin.
On the other hand, SBA loans are easier to securitize than most other loans because they are more homogenous.
“They’re based off of prime [the US prime rate], they're quarterly adjust, there is no deviation and your interest rates are rather the same,” said Gilpin. “From an investor and credit rating agency perspective, it’s easier.”
Determining pricing has historically been an obstacle to trading the 25% unguaranteed portions of SBA loans. Falcon Bridge’s solution is to rely on overcollateralization instead, and determine the amount of risk retained by each originator individually.
“All these loans come in at par, whether it's backed by working capital, real estate, everything comes in at par,” Sunil Chowdry, president and CEO of Falcon Bridge, told Coleman.
Another serving
Falcon Bridge is working on a third transaction with Community Bank, Lendistry and one to two other lenders to close by the end of this year, and is considering a fourth deal for next spring.
“We are trying to keep a quarterly schedule,” Chowdry told Coleman.
“It is our business strategy and model to try to produce two a year within this space,” added Gilpin. “I think you'll see more institutions want to participate in this, which is great because there's a tremendous secondary market for this credit out there.”
The securitized product has attracted investors who could otherwise not participate in the SBA loan market, because SBA lenders can only sell unguaranteed portions to other SBA lenders, and the larger ticket size of pooled assets in SOUP appeals to larger institutional investors.
“Predominantly, we've had a lot of interest from insurance companies [and] private equity,” said Aga Linksy, vice president and portfolio manager at Falcon Bridge, speaking in the intervew with Coleman. “We have conversations ongoing with all kinds of different investors.”
“Large European insurance companies do purchase and do back government-guaranteed credits from the United States. That market is starting to increase,” added Gilpin.
Meanwhile, Falcon is not the only firm to have set up a platform to make it easier for lenders to securitize the unguaranteed portions of their SBA 7(a) loans.
In January, Momentus Securities launched a platform that employs a master trust structure to issue distinct series trusts for each lender that uses it, meaning that, unlike Falcon’s programme, each series will be backed by SBA loans with a single originator. Guidehouse also acts as administrator, back-up servicer and custodian for this program.
Growing appetite
Demand for SBA 7(a) loans shot up during the pandemic and has remained at historically high levels, leading the agency to approve a record $37bn during the fiscal year that ended in September 2025, up from an average of around $23bn-$24bn in the mid-2010s.
The broadening of the program to smaller-sized loans may have contributed to the high take-up. More than half of 7(a) loans were under $150,000 and more than 80% were under $500,000 in the twelve months to September, according to SBA data.
At the same time, US banks reported tightening lending standards for small business commercial and industrial loans in the July 2025 Federal Reserve senior loan officer opinion survey. Smaller loans are more resource-intensive to originate relative to the ticket size.
“As businesses in the economy starts to see more and more pressure, your large institutions tend to constrict or pull in their lending box to the larger metropolitan areas,” said Gilpin.
As large banks withdraw from lending outside of big cities, smaller community banks face increasing pressure to meet the needs of rural and small-town businesses, he said.
And although the SBA tightened up its own lending policies as of June, Gilpin still sees room for growing demand.
“As credit boxes start to tighten companies that normally would not look for a government guaranteed credit are now finding themselves that that is the only credit that's available,” he said.
Tapping the capital markets by securitizing unguaranteed portions of loans is one way to alleviate some of the pressure.
“It's just one more tool in the toolbox to tie Wall Street and Main Street together to allow Wall Street to assist Main Street in fulfilling our purpose, which is to help underserved in rural markets,” said Gilpin.
Falcon Bridge did not reply to requests for comment.
