17 July 2019

Federal Government to Streamline SBA Loan Requirements

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The federal government is streamlining some requirements banks use to grant small loans backed by the Small Business Administration, in a move intended to help more blacks and other minorities borrow funds for business ventures.

Loans backed by the SBA are a crucial source of financing for many entrepreneurs, who can generally borrow as much as $5 million to start, buy or expand a business through the agency's two biggest programs. Banks and other financial institutions make the loans, with the government promising to cover as much as 85% of any loan losses.

But black business owners have largely missed out on the rebound in federal small business lending since the end of the financial crisis because of financial distress, tighter lending standards and changes in lending practices. In January, The Wall Street Journal reported that black business owners received just 2.3% of the roughly 54,000 loans made by the SBA in fiscal 2013, down from 11% in 2008.

Changes to be announced Tuesday are intended to reverse a falloff in originations of small SBA loans.

Beginning July 1, lenders will no longer have to perform an analysis of cash flow or debt-service coverage on loans of $350,000 or less, provided business owners meet the agency's credit standards. Eliminating the two requirements is expected to cut the time needed to originate a small-dollar loan by as much as 50%, SBA officials say.

The changes "will simplify and streamline the lending process, which will incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs," SBA administrator Maria Contreras-Sweet said.

Historically, 90% of SBA loans to black business owners are for $350,000 or less, the agency said. In the current fiscal year, the average SBA loan size was $358,506, nearly double the average of $192,919 in 2005.

The change in underwriting requirements is the latest effort to boost the use of an SBA program for loans of $350,000 or less known as Small Loan Advantage, introduced in 2011. Two years ago, the SBA introduced a credit scoring model for the program that looks at the credit record of both the business owner and the business.

Traditional credit scoring models that focus only on a business owner's credit record can penalize entrepreneurs who have a solid business, but fell behind on personal bills during the recession. SBA officials say that the new approach to credit scoring has helped boost the portion of SBA loans to African-American borrowers to 2.8% in the current 2014 fiscal year, based on the number of loans granted.

In another effort to simplify SBA lending and increase the number of lenders participating in the program, the agency will early next year introduce a new electronic platform for originating and closing government-backed loans that will include a Web-based tool laying out SBA rules, a process for submitting electronic signatures and online document storage.

Under the current system, SBA lenders must turn to a 321-page manual for program guidelines. Some lenders use outside software to streamline the SBA process, while others still mail in loan paperwork.

Click here for the original article in the Wall Street Journal.

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