Most banks have a hard time making money in the smallest of Small Business Administration-backed loans, but Golden Pacific Bancorp believes it has hit upon a solution for making such loans worthwhile.
The Sacramento, Calif., company has teamed up with the financial technology firm Better Finance to establish a fully automated loan platform that is designed to sharply reduce the time it takes to approve and process an SBA loan.
The program, called SmartBiz, is aimed at entrepreneurs seeking SBA loans of between $5,000 and $150,000.By automating the application, underwriting and origination processes, Golden Pacific has reduced borrowers' wait times on SBA loans to a matter of days, rather than weeks.
The goal is to make SBA loans an "economically feasible product," says Roy Malone, president of the $133 million-asset Golden Pacific.
Golden Pacific began testing SmartBiz in October and has closed about 50 loans, totaling just over $1 million, through the program since. Now that the program has launched officially, Golden Pacific and Better Finance plan to license the SmartBiz technology to other lenders.
"The microlending space for small businesses is really underserved," Malone says. "By leveraging technology and partnering with the right firm, we can start bringing these small-dollar capital loans to the mom-and-pop shops and the one-man shows."
Banks generally shy away from making very small SBA loans because it takes as much time and paperwork to underwrite a small loan than a larger one, and larger ones are simply more profitable. The average size of an SBA 7(a) loan in fiscal year 2013 was nearly $386,000, compared with $143,000 six years earlier.
At the same time, some borrowers who might qualify for SBA loans but are frustrated by the documentation requirements and approval wait times are turning to alternative, mostly online, lenders that can offer quicker turnaround times thought at higher rates.
The SBA has taken steps to encourage lenders to make smaller loans. In 2012, it streamlined the application process for all loans of less than $350,000 and late last year it eliminated fees on loans of less than $150,000.
Still, it generally takes 60 to 90 days for an SBA loan to be approved, and Golden Pacific's selling point is that it can now approve and process loans in roughly five to seven business days. It is betting that its fast turnaround time lower borrowing costs, and longer-term loan options will lure potential business borrowers away from both banks and alternative lenders like Kabbage and borro.
"We found that many alternative lenders that have entered the space in the past few years charge double-digit rates and have short loan terms," Evan Singer, the general manager of the SmartBiz program, wrote in an email.
SmartBiz is offering loans that could run as long as 10 years and carry interest rates in 6% to 8% range. The money that the program saves through the automation process also allows it offer SBA loans as low as $5,000, according to Singer.
Golden Pacific first met with Better Finance, which previously operated under the name BillFloat, about creating an automated platform in late 2012.
Better Finance is an online consumer lender, "and we talked to them about taking that same technology and tweaking it and leveraging what we do so that it could make economic sense and create efficiencies in the small-business world," Malone says.
Next up for Malone is selling SmartBiz to other banks. Malone says that he is working on licensing the technology to one bank "and we will license to others that want to use the technology to improve their efficiencies."
Each bank that chooses to participate will have a URL associated with the SmartBiz brand. All loan applications will come through the SmartBiz brand, with underwriting and origination responsibilities redirected to one of the participating lenders. Government agencies that provide assistance to small-business owners will also be able to partner with SmartBiz, Malone says.