Creating a secondary market for small-business loans could benefit entrepreneurs by increasing the overall amount for lending, according to a recent report commissioned by the Small Business Administration. Banks have traditionally securitized and sold off mortgages and auto loans, but not small business loans. The reason is that many banks rely on personal relationships, rather than straight financial analysis, in funding small companies. The risk involved with these loans is therefore hard to calculate, making them difficult to package and sell. But now, Bank of America, Bank One, and others are using credit scoring for loans under $100,000, which makes assessing risk easier. The report's co-author predicts this will result in lower rates or fees, and more choices for entrepreneurs. The catch: SBA economist Charles Ou says it may take a cash crunch to get a secondary market up and running. "If the money is tight, banks could use their small-business loan portfolio for liquidity," he explains.
Published on: Sep 1, 2003