How a North Carolina Startup Became the Nation’s Largest SBA Lender

By Evan Sparks

The second-largest lender in the Small Business Administration’s popular 7(a) loan program is a really big bank—Wells Fargo, the nation’s fourth-largest bank with $1.9 trillion in assets.

The largest SBA 7(a) lender might surprise you: Live Oak Bank, a $3.6 billion (and growing) institution based in Wilmington, N.C. As of the end of 2018, Live Oak had $426 million in approved SBA loans, with Wells Fargo following at $249 million.

Live Oak was founded a little over a decade ago and has earned a reputation in the industry as an outstanding workplace (see our cover story in the July/August 2018 issue) and as a technology innovator. That innovation began with a vision of being a tech-enabled small business lender. Chip Mahan, a former bank CEO who founded the first online-only U.S. bank in 1995, had transitioned to a career as a financial software entrepreneur.

But in the mid-2000s, he became “completely enamored” with a novel business model: make an SBA-guaranteed loan and sell 75 percent of it. “At the time we were also able to sell a substantial portion or 15 percent of the unguaranteed paper to other banks,” Mahan explains. “By the time you do the math and say, ‘Well, I’m only going to be left with between 25 and 10 percent of the face amount of the note and generate a large gain on sale dollar and recurring revenues from a servicing standpoint’ . . . . We modeled it out to be—which is what it was for seven or eight years—about a 35 percent ROE business and about a 4 percent ROA business.”

And Live Oak, which Mahan leads as chairman and CEO, prides itself on its performance with SBA loans. “Our loss ratio is about a tenth of a typical SBA lender,” says Mahan. One reason, he says, is Live Oak’s approach to hiring. The company hires industry practitioners to staff its 21 verticals, which range from as broad as agriculture, hotels and healthcare to as focused as HVAC repair, fitness centers, funeral homes and self-storage.

Mahan describes how the model works: “Hir[e]a person that has run a business in that vertical, or hav[e]them become a director of our bank, and then have those folks sit down with the credit department and say, ‘Here’s how you ought to lend money to this industry in my judgement,’ and then for us to say to our 85 salespeople across the board, ‘Bring us something inside that credit box.’” This, he adds, “has served us quite well in terms of safety and soundness.”

While the bank lends to businesses nationwide from its Wilmington headquarters, its style can fairly be described with the industry cliché of “high-touch, high-tech.” The company has a small fleet of planes on call so that relationship managers can get to their customers quickly, establish face-to-face relationships and maintain them over time.

And through the bank’s technology investments and partnerships, it has worked to “perfect the handoff,” as Mahan puts it. “In the early days it was like we kept FedEx in business, because we’re sending 10-inch-thick documents at the speed of a mail truck.” So the bank developed a platform in-house to manage the process, keep data in one place, and allow the lender, underwriter, closer and servicer to work together seamlessly without putting burdens on the customer. This platform Live Oak eventually spun out as nCino.

Ultimately, Mahan is looking to a banking future that’s rooted in personal touch and technological efficiency. “If we have the advantage that we have by being a federally regulated bank with a cost of funds that is part of that plan—and I believe that we can get our costs down on the delivery of those products in a fully digital fashion—then we have a chance of really winning.”