Small business lending is having a moment. On the one hand, you have the tech companies scaling their lending operations (Quickbooks, PayPal, Square, Shopify and Amazon for example), making credit available for their clients more quickly and easily than ever before. On the other hand, you have the Small Business Administration (SBA) making changes to its lending program, making it easier to obtain low-cost financing.
I have written about the former before so today I want to focus on the SBA, the changes they are making and whether we are moving in the right direction here.
Bankrate and The Wall Street Journal both published good pieces earlier this week describing all the changes at the SBA. So, I am not going to get into the details of it here. But I did reach out to a couple of experts on what these new rules will mean for small business.
Here is what Kale Gaston, Head of Government Guaranteed Lending at LendingClub had to say:
“The intent of the new rules is to allow small businesses to access capital through the SBA programs in a way that is similar to how banks do their non-SBA loans. The idea is to make the process easier for the borrowers to get an SBA loan, especially for loans that are under $500,000. In theory, this could improve the ability for small businesses to obtain capital through the SBA programs.”
Gaston was also quoted in the WSJ article as being concerned that the new rules could lead to some lenders making loans that aren’t prudent.
Expansion of the SBA 7(a) program
While Ryan Metcalf, the Head of U.S. Public Affairs for Funding Circle was also generally supportive of the new rules, he had a lot more to say on another change the SBA is making. It is ending the 40-year moratorium on new licenses for their popular 7(a) lending program. Ryan had this to say on the expansion of that program:
“With more than 50% of small businesses experiencing funding gaps and more than 50% of banks imposing stricter lending standards, there are serious and growing gaps in access to credit for American small businesses. As with most things, these gaps disproportionately affect minority communities.
Numerous studies confirm the integral role that Fintech SBL platforms play in supporting small businesses by creating a more inclusive financial system including the most recent study by the Philadelphia Federal Reserve and Bank for International Settlements which concluded that Fintech lenders are “increasing access to capital at a lower cost for small businesses who are less likely to receive credit from traditional banks…” and “predicting future loan performance more accurately than the conventional method to credit scoring, leading to better loan performance”.
The SBA decision to remove its 40-year moratorium on licensing more SBLCs is long overdue because the market is not sufficiently serviced by only 14 SBLC’s or the other relatively few banks or credit unions that participate in the program and who primarily only make loans averaging between $500k-$1m. SBA needs lenders in the program that specializes in loans under $150,000 which is exactly the market Fintech lenders serve.”
Of course, as a fintech enthusiast, I agree with many of the points that Metcalf makes here. Not everyone is in agreement, though. Gaston, who works for a fintech lender with an existing SBA license (courtesy of LendingClub’s acquisition of Radius Bank), was dubious about the benefits:
The idea of bringing in more lenders into the program is always a good plan. However, it appears the rules for the new lenders are less onerous than for existing lenders and this could bring undue risk to the program if these lenders are not required to abide by the rules and regulations that existing SBA lenders are required to follow.
No, we don’t want any more fintechs at the SBA
There is even a push in Congress to disallow the SBA from adding new fintech lenders. New legislation put forward by Senators Cardin (D-MD) and Ernst (R-IA) called the Community Advantage Loan Program Act of 2023 has passed out of committee on an 18-1 vote. There is concern among lawmakers about the SBA’s ability to regulate non-bank lenders.
Now, the industry associations are not taking this lying down. A group of trade associations authored a letter in response to this bill, arguing that it would create unnecessary burdens on fintech lenders by subjecting them to tougher requirements than all other SBA lenders.
Let’s take a step back for a minute. Access to low-cost credit is vital for small businesses and the SBA is usually the best option when it comes to cost. But the burden on the small business owner can be ridiculous. Fintech Nexus went through the bank application process ourselves late last year as we sought a low-cost loan to fund future growth.
After dozens of hours of work and hundreds of pages of documents, we were denied the loan, despite being a profitable business with a 10-year track record. Our revenue was too volatile (they simply didn’t understand the events business). What an utter waste of time that was.
It became clear to me that it is the process that is completely broken. Even if we had been approved the time and effort involved is barely worth the low cost. I compare this to heading over to Quickbooks Capital where there are literally no document requirements whatsoever, the application takes minutes and approval is received in just seconds. Now, the cost is higher but for busy entrepreneurs the appeal of tech-enabled lenders is clear.
I laughed out loud when I saw this quote in the WSJ article from Tony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders when talking about the SBA and the need for any kind of new rules:
“Our system is not broken. I don’t know what they are trying to fix.”
Clearly, he has not spoken to many small business owners applying for an SBA loan. And it makes me wonder if he has spent any time with fintech lenders lately.
I have been a small business owner my entire career. Access to funding to grow a business is always a challenge. The amount of time wasted applying for loans is a disgrace. We are almost creating a bifurcated system with banks on one side and fintechs on the other. One is a terrible experience but low cost, the other is a great experience but higher cost.
It would be better if banks and the SBA could learn from the experience of tech-enabled lenders to create a truly better system. The SBA is trying but there is still so much more to be done. We are still a long way from small business utopia as described by Karen Mills in her 2019 book.
