The Small Business Administration's newest boss Maria Contreras-Sweet laid out her plans for economic growth on Tuesday, signalling that the smallest businesses will be the cornerstone of a new lending initiative.
Speaking at the Center for American Progress in Washington, D.C., she unveiled a new program the SBA hopes will get more smaller loans to entrepreneurs, primarily through its flagship 7(a) program. The SBA acts as a backstop for these loans, which can be as high as $5 million. Banks originate the loans and benefit from a federal guarantee against default.
Although the SBA has reached record levels of lending since the recession, many critics have called to task the SBA and banks in its program for making too many big loans that are in the end more profitable for banks. Typically, businesses owned by minorities and immigrants take out smaller loans, and Contreras-Sweet drew heavily on her own experience as a minority entrpreneur and immigrant to drive the point home of why changes are in order.
"I immigrated to this country from Guadalajara at the age of five, not speaking a word of English," Contreras-Sweet said. "My mother worked at a poultry processing plant so her six children could have opportunities she never had."
Streamlining and Expanding
Four out of five requests for loans from African and Hispanic Americans are for amounts of $150,000 or less, Contreras-Sweet said. And with that in mind, the SBA is rolling out a new credit scoring system that will let banks make faster decisions on smaller financing requests, and with less paperwork involved. In addition to streamlining the process for approving smaller loans, the SBA hopes to increase the number of banks that lend through its guaranteed loan program.
"The time has come to reach out to all of our lending partners on small loans and bring new lenders into the SBA fold," Contreras-Sweet said in prepared remarks.
New Model for Credit Scoring
At the heart of the drive is a new credit scoring model the SBA claims it has developed over the last decade through its Office of Capital Access, which combines a small business owners peronal and business credit scores.
"The SBA’s total credit score will make it easier and less time-intensive for banks to do business with the SBA," Contreras-Sweet said. "This model is cost-reducing and credit-based. It ensures that risk characteristics--not socio-economic factors--determine who is deemed creditworthy."
In conjunction with the new credit scoring model, the SBA is launching something it calls SBA One, which will allow banks to send and receve electronic documents and signatures.
"By making the process quicker, cheaper, and more intutiive, these reforms will help existing lenders do more small-dollar lending," Contreras-Sweet said. The new scoring system will be available in July. SBA One will start early in 2015.