Small business credit access grew in 2018 and with modifications to the Small Business Administration (SBA) rules for more streamlined processing, access is predicted to grow. However, untapped opportunities for growth remain for startups and minority owned businesses as suggested in SBA research. What are the funding options for these groups that the SBA is offering and how can your organization better serve them as well?
This issue was discussed at the NAGGL 2019, National Association of Government Guaranteed Lenders, conference where hundreds of SBA lenders gathered to learn about policy changes, SBA online application submission solutions, how to create successful sales reps, and other trends in the industry impacting SBA lenders. SBA programs give businesses access to credit such as 7(a) loans for any purpose, microloans and 504 Certified Development Company (CDC) Loans for fixed-rate mortgage and equipment financing. Other programs are available to businesses to find investors, conduct R&D or to secure bonding. The programs and NAGGL event attract mostly community banks and credit unions across the US because the SBA is known for connecting businesses with their local providers. FICO attended and exhibited at the event to connect with lenders on FICO® Small Business Scoring ServiceSM (SBSSSM), a score used by the SBA to assess risk of businesses and determine funding eligibility.
Linda McMahon, Administrator of the SBA, gave the opening keynote where she shared SBA updates and the economic success that these Government Guaranteed Lenders have contributed to. Small business lending was strong in 2018 and pro small business growth policies have been conducive to that growth. However, there is even more opportunity that small businesses are not realizing. Specifically, the underserved businesses such as startups, those run by minorities and veterans, and businesses in rural areas which is now a focus area of growth for the SBA according to McMahon.
To change this, the SBA is improving technology solutions to better match businesses with lenders, see quicker turnaround times, and achieve higher approval rates. They created new educational resources about programs they offer for use by lenders and borrowers to understand and share all program details, requirements and terms.
FICO similarly works to help community banks and credit unions understand how they can increase loans given to those underserved businesses and do so profitably. As I spoke to these lenders, they recognize that something needs to change with the traditional underwriting processes at their organization, but they have many hurdles such as getting leadership on board with decision automation, cost of technology and cost of compliance.
FICO believes it’s important for lenders to understand small business scoring and how it’s different than consumer credit scoring such as a FICO® Score. Business owners often apply for personal loans to get credit for their business so personal data is used to make the decision. This becomes a problem because personal data alone isn’t predictive of business success. Information on the business credit information, and success of similar business portfolios isn't factored into the funding decision when it must be. Having a scoring model that is built on historical business portfolio data will give business owners more chances at funding because the applications are more fairly and consistently assessed. Even with limited or no business and personal credit history.