A Surprising Obstacle in Small Biz Lending: Fax Machines
No movie scene conveys society's frustration with old-school office hardware better than the famous one in "Office Space" — in which a group of disgruntled co-workers destroy their company's fickle printer with baseball bats.
These days, bankers may feel similarly about their fax machine, a relic that predates the digital age but is still making loan processing difficult.
Fax machine use has declined to the point where many offices no longer have them at all. Electronic communications are infinitely faster and more efficient. However, one diehard fan of faxed communication still exists. It will surprise no one to hear that that holdout is the Internal Revenue Service.
This preference isn't merely inconvenient and out-of-step with modern business practices. When the IRS documents are transmitted via fax, it slows down lending to a degree that may threaten small business' livelihood. It also introduces an unfair advantage to unregulated digital marketplace lenders, who aren't bound by the same antiquated rules and therefore can act with greater speed. The result? An unequal playing field among lenders, higher lending costs for small businesses and a competitive landscape that doesn't operate as efficiently as it could. All because of the lowly fax machine.
Imagine you own a restaurant, and your air conditioning dies in the middle of summer. The restaurant cannot serve customers without a working air conditioner, but cash is tight and this is a big expense. A small short-term loan could fix this immediate need.
You walk into your local bank and ask for a $20,000 loan to replace your air conditioning. The bank understands your financial situation and knows your history well as a customer. If they could just loan you the money, they would — but for traditional banks it's not that easy. Regulated institutions must go through an underwriting process in order to satisfy the regulators, ensuring their loans can be repaid by the borrower.
The underwriting process is slow, but over the years banks have invested in technology to speed up the process. However, all of the technology in the world cannot speed up the process used for a third party to get a tax transcript from the IRS, submitting a form called the IRS 4506-T.
Once filled out, the form is typically faxed to the IRS for processing. Assuming the fax went through and reaches the appropriate IRS employee, the form is scrutinized, often rejected for missing items such as "LLC" or "Inc". The tax transcript is then returned in PDF format to a secure mailbox on the IRS website, where the lender can log in and download the form. The process is estimated to take about two days, but the IRS has noted that it could take longer. What is worse, the IRS could also reject the request for the tax transcript, forcing the entire process to start over.
Let's go back to the restaurant. You need the air conditioning today and you need the money now. But the bank application process will take at least three business days, maybe a week or more. Suddenly borrowing from your trusted bank is no longer a sufficiently fast option, and you're forced to find an alternative source of funds. Maybe you have a rich family member who can spare $20,000 for a few weeks. Or you can go online and find a nonbank lender that can offer same-day cash to small businesses. Yes, the fees may be much higher and the loan terms are often not nearly as good, but the money is in your account when you need it. To keep your restaurant's doors open, you choose speed over cost.
Recently, Reps. Patrick McHenry, R-N.C., and Pat Tiberi, R-Ohio, introduced the IRS Data Verification Modernization Act. This legislation requires the IRS to accept electronic transmission of the 4506-T form with a near-real-time return of information. Such a simple requirement could speed up the lending process by days, leveling the playing field so all lenders can compete on both loan terms and fund availability. Small-businesses will benefit, too, increasing their choices among lenders which, in turn, will lower average lending costs and keep businesses flourishing with the capital they need, when they need it.
Trevor Dryer is CEO and co-founder of Mirador. He can be reached on Twitter @mirador.