Maria Contreras-Sweet is in a hurry to shake things up in order to make financing more accessible for small-business owners. The former entrepreneur and banking executive had only begun her job as Administrator of the U.S. Small Business Administration in April, but with a stroke of the pen she instructed the federal agency to slash its red tape and underwriting requirements for guaranteeing loans of $350,000 or less.
That could be a big deal for entrepreneurs nationwide who need small amounts of funding to start, expand or buy a business. In some instances, it may even be used to refinance existing debt if it is burdensome to your business success.
Accordingly, Contreras-Sweet decided to unleash a new way to use a predictive credit scoring model that SBA has experimented with during the past few years. She expects it to bring more lenders into the agency's lending programs and also encourage existing ones to make loans as low as $5,000.
"The time has come to reach out to all of our lending partners on small loans and bring new lenders into the SBA fold," she announced on June 6. "SBA's total credit score will make it easier and less time-intensive for banks to do business with the SBA."
For loans of $350,000 or less, the agency will permit its lenders to submit two forms that will quickly generate a credit score from the agency based upon the business owner's personal credit, the company and its projected success.
"We're now so confident of our model's predictive value on small loans that we're eliminating cumbersome analyses of a company's cash flow, a step that can delay loan decisions," Contreras-Sweet says. "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."
Kimberly Rayer, a Pennsylvania-based lawyer with Starfield and Smith reviewed the new directive that is now part of SBA's standard operating procedures (SOP) for most loans of $350,000 or less. "The changes to the SOP by the 7(a) Small Loans Credit Amendment are intended to streamline the underwriting process for 7(a) Small Loans by placing more emphasis on the SBA credit score in determining creditworthiness of a Small Business Applicant," she says. It removes "some of the time consuming credit analysis previously required for 7(a) Small Loans and which are still required for SBA loans over $350,000." Even so, she tells lenders that they should still analyze the applicant's ability to repay the loan.
Rayer says that if the applicant's credit score meets the minimum requirements set by SBA, it will satisfy much of the time-consuming analysis that lenders would otherwise have to make. Instead, the lenders submit the required two forms electronically to the agency and receive a quick response with the credit score.
The new credit-scoring model was developed by Fair Isaacs Company (FICO). In turn, BoeFly.com, an online matching service that connects lenders with borrowers, created bQual, a proprietary program based upon the FICO's new model. "We built bQual to address the questions we've heard from some of the thousands of business owners that have used BoeFly since we launched in March of 2010," says Mike Rozman, its co-president. It is designed to give borrowers "real-time information and insight" before they start searching for a lender.
SBA 7(a) loans go up to $5 million. Yet, the biggest need is for the lower amounts and the agency's new initiative is addressing this void.
Jerry Chautin is a volunteer SCORE business mentor, business and real estate columnist, blogger and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin
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