The Small Business Administration believes it has found the right balance to speed up its loan process while maintaining credit quality. Some observers have their doubts.
The agency will no longer require lenders to complete an analysis of certain borrowers' cash flow or debt-service coverage on 7(a) loans of $350,000 or less, starting July 1. The move is designed to accelerate the application process and reach underserved business owners.
Some industry observers, while appreciative of efforts to reduce the amount of time and paperwork for a small-business owner to get a loan, are expressing concerns that the change could contribute to credit deterioration.
"I applaud the efforts and the new administration but I have mixed thoughts" about the new credit requirements, says Arne Monson, president of Holtmeyer & Monson, a firm that provides SBA lending services to banks. "I think it is shortsighted and will lead to problems."
The SBA has implemented changes to encourage lenders to make more small-dollar loans. Lenders sometimes avoid these loans because they take the same amount of work and time to complete as bigger, more profitable loans, experts say. The agency last fall waived fees on 7(a) loans of $150,000 or less to generate more interest.
Eliminating a requirement for cash-flow analysis, one of the most time-consuming parts of underwriting, should cut the time it takes to complete the process in half, says Ann Marie Mehlum, associate administrator for the SBA's Office of Capital Access.
The SBA is able to take this step after working on a credit scoring model since 2006, she says. The credit scoring takes into consideration a borrower's personal and business credit score but gives more weight to the business data. Borrowers who meet a minimum score can skip the additional paperwork.
"We have been finding that it is becoming increasingly difficult and costly for lenders to make small dollar loans," Mehlum says. "The SBA is working on refining and streamlining that process. We realized that it was time to allow our lenders to rely on that credit score because it is predicting repayment extremely accurately."
It's hoped that the change will serve a more diverse group of borrowers, SBA Administrator Maria Contreras-Sweet said during a speech last week. Four out of five loan applications the SBA receives from Hispanic-American and African-American business owners are for $150,000 or less. "The face of entrepreneurship is changing in America," she said.
"More of those faces today belong to women, Latinos, African-Americans, Asian Americans, Native Americans, veterans, seniors, and business owners who are socially and economically disadvantaged," Contreras-Sweet added. "Too many in these groups cannot access the requisite expansion capital. Your gender, your race, your age, or your neighborhood should never impact whether you can get a small business loan. Only your creditworthiness should."
One reason a bank may steer clear of making SBA loans is that it requires a lot of paperwork, says James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. Hopefully, he said, the SBA's latest change will encourage more lenders to consider the program.
The time it takes to complete an SBA loan application can also be a deterrent to some borrowers, says Paul Patout, chairman and chief executive of the $377 million-asset Gulf Coast Bank in Abbeville, La. Anything to help hasten the process is welcomed.
"When you mention SBA, the first thing that comes to a borrower's mind is time," Patout says. "When a guy comes in here for a loan and is thinking they need to close in 30 days, an SBA loan may take too long. This allows lenders to move forward much faster."
Concerns remain that the changes could lead to a loosening of underwriting standards. The SBA, for its part, is confident it won't see a rise in problem loans, Mehlum says.
"I'm an old credit guy," says Ray Chiamulera, president of Radar Lender Services. "It's hard to agree to giving money to anyone without knowing how they will pay it back."
Smaller banks are less likely to abandon the cash flow analysis, while bigger banks might feel more comfortable relying on credit scoring, says Chiamulera, who heard from lenders he works with that they were unlikely to make any changes.
Loan delinquencies could spike within a year after the change is implemented, Monson says. To drive interest in SBA loans, the agency should consider increasing its guarantee percentage or by waiving fees, not removing the cash flow analysis, he says.
"I know our clients and we will not lower our standards," Monson adds. "SBA lending is specialty lending. There's already some inherent weakness there. You must have sufficient cash flow."