KBRA releases research analyzing the small business lending (SBL) sector, which has emerged as a meaningful asset class within structured finance, driven by alternative capital sources, fintech innovation, and shifting borrower demand. Over the past decade, KBRA has rated more than $14 billion in small business ABS in the United States.

This report provides an overview of the changing SBL landscape, with a focus on term loans, lines of credit (LoC), and merchant cash advances (MCA). Further, we examine origination channels and practices that shape borrower acquisition and their implications for ABS structures and considers the role of guarantees, security interests, and regulatory factors in influencing credit performance.

Key Takeaways

• Nonbank and fintech lenders have become vital sources of working capital for small businesses, using data-driven underwriting to fill the gap left by traditional banks and expanding the pool of collateral for small business ABS. As of 2024, their share of applications stood at 24%, increasing from 17% in 2020.
• Term loans, LoCs, and MCAs each carry distinct legal, structural, and credit risk considerations. Unlike term loans and LoCs, MCAs are not considered debt and therefore have limited avenues of recourse for lenders relative to loans and LoCs.
• The mix of direct originations versus broker-driven channels may impact portfolio quality, with direct originations typically leading to higher quality applicants, while syndication arrangements increasingly serve to align interests and extend lending capacity.
• The use of performance or personal guarantees and Uniform Commercial Code (UCC) filings establishes varying levels of lender protection and affects recoveries in stress scenarios.
• A growing patchwork of state laws now requires consumer-style disclosures for small business financing, including annual percentage rate (APR) and total repayment terms. These rules vary across jurisdictions, creating operational complexity and potential liability for interstate or national lenders. Products like MCAs, which do not naturally fit into APR frameworks, face heightened compliance challenges—raising legal, reputational, and competitive risks for issuers.

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About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1011773

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