Fintechs could make life easier for overtaxed SBA
The partial government shutdown is over — at least for now. But thousands of small businesses are still feeling its effects.
One of the consequences of the shutdown was a halt to the Small Business Administration’s business lending program. While the SBA does not directly lend itself, it still must process applications for the business loans that it guarantees. This includes almost 200 loans a day as part of the 7(a) program alone, the SBA’s most popular type of loan program. With the shutdown lasting 21 working days, that’s potentially more than 4,000 small businesses that were waiting to hear back if they can hire, move, sign a big contract or make an important purchase. Not to mention, this delay was on top of a process that already takes weeks or months.
Small businesses employ one out of two American employees, and create the majority of new jobs. When they can’t get the affordable funding they need, when they need it, the impact may be felt by the owners, employees, their families, clients and customers.
The SBA is in a class of its own as a conduit for affordable capital to small businesses. It approved over 68,000 loans, totaling more than $25.44 billion, through the 7(a) loan program in the 2017 fiscal year. Many of these loans were for amounts, terms and rates that a bank would never offer otherwise.
The government shutdown highlights an opportunity for the government to evolve this program. One potential opportunity is to prioritize working with fintech credit providers, including enhancing capital market access for small business assets. Fintechs have shown that they can reduce delays and inefficiencies in the lending process, without sacrificing credit affordability, rigorous risk assessment, or compliance and controls.
Even aside from the shutdown, business owners seeking 7(a) loans go through a process that is unnecessarily long, complex and with multiple fees. They may be asked for documents like a written profile of their business, or the personal resumes of the owners. And they may have to pay a credit check fee, packaging fee, referral fee or other added fees. This is not how business lending needs to work today.
A business owner’s time is their most valuable resource. They expect applications they can submit on their phones 24/7, and decisions in hours or days. They don’t have time to prepare massive packets of documents. They also expect simple fee structures and transparency throughout the process.
Unlike most traditional banks, fintechs are unencumbered by legacy systems and structures that slow down decisioning. They can automate most of the credit risk evaluation process, and use models that become stronger and more predictive over time. By adopting this more modern approach to business lending, the points of friction that require manual work by the SBA, and slow down the availability of credit to small businesses, can be improved, diminishing the impact of government disruption.
Beyond simply being more open to nonbank lenders, there’s so much further the SBA could go. Imagine what could happen if a fraction of the $153 million the SBA spends each year on business loan program administration were invested directly in business loans through a lending platform.
The SBA’s business loan program is one of the most important mechanisms the government has to drive growth in the economy. We owe it to small businesses to bring this program into the 21st century. Establishing a new relationship between the SBA and fintechs can help this program not only weather the inevitable next shutdown, but also expand and accomplish its mission more effectively.