The SBA’s Plan to Boost Loans to Minority Entrepreneurs

By Patrick Clark

The Small Business Administration has a size problem. To help Main Street businesses recover from the Great Recession, the agency increased the size of the loans it was willing to guarantee. That helped boost the dollar amount of loans it backstopped last year by 40 percent from 2009 levels, to $29.6 billion.

The big boost to loan volume was’t matched by a similar increase in the number of SBA-backed loans. As a result, the size of the average SBA loan increased, to $547,000 last year from $372,000 in 2009.

That shift is good for lenders because it takes a comparable amount of time and effort to underwrite a loan for $1 million and a loan for $100,000; larger loans generate more revenue from interest. It’s bad for the smallest U.S.. businesses, including those owned by minority entrepreneurs who already face an uphill battle getting credit.
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To help those business owners, the SBA is trying to promote smaller loans. In October, it waived a 2 percent fee for loans of less than $150,000—a move the agency says has already led to a 15 percent increase in small loans. And today, SBA chief Maria Contreras-Sweet said the agency would speed up approvals for loans of $350,000 or less, relying more heavily on credit-scoring processes that the agency has been developing for more than a decade.

“We’re making these changes, knowing it will simplify and streamline the lending process and get more small loans into the hands of entrepreneurs, especially the underserved,” Contreras-Sweet said today in a speech hosted by the Center for American Progress, a Washington think tank. That should help minority-owned businesses in particular, she said, because 80 percent of SBA loan applications from black and Hispanic business owners are for $150,000 or less.

Speeding up the approval process for small loans may also prevent more business owners of any race from taking on expensive debt from merchant cash-advance providers and other nonbank lenders. Those loans, often marketed as being approved quickly, can carry annualized interest rates in excess of 100 percent, many times more than the single-digit interest rates typical of loans backed by the SBA.
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The new policy, which takes effect next month, will pare by as much as 50 percent the time it takes to originate an SBA loan by eliminating the need for certain financial analysis, according to the Wall Street Journal.

There’s a flip side to easing the approval process. Earlier this year, the SBA drew fire from Senator Jeff Sessions, an Alabama Republican who worried that government guarantees and lax oversight were leading banks to make bad lending decisions. “The lender still makes a profit while taxpayers shoulder the cost of the default,” wrote Sessions in an April letter to Contreras-Sweet. Along those lines, simplifying the approval process for small loans sounds like a good thing for small business owners—unless it encourages banks to make loans that business owners can’t afford.

This article from The New Entrepreneur can be found here