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.
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for the original article in the Wall Street Journal.