- The Small Business Administration announced new efforts to assist entrepreneurs in getting loans.
- This includes simplifying loan requirements and expanding nonbank lenders that can issue SBA loans.
The Biden Administration is making it simpler for many small business owners to get the loans they need to start and grow their businesses.
As part of a series of changes, the Small Business Administration is simplifying loan requirements, making it easier for financial-technology firms to participate. The SBA is also increasing the scope of nonbank lenders that are licensed to issue SBA loans.
Many of these changes went into effect August 1 and were launched to assist small businesses that have had difficulty securing funding, given many banks have focused more on larger commercial borrowers.
"Capital is the catalyst to starting and growing small businesses. The changes Administrator Guzman is making to SBA small business loan programs are critical to addressing persistent capital access gaps, particularly for rural and minority-owned small businesses," Han Nguyen, SBA spokesman, said in a statement to Insider. "By leveling the playing field and fostering inclusive opportunities through these actions, we are paving the way for diverse and dynamic small businesses and innovative startups to grow, creating a stronger and more resilient economy for all."
SBA loans, typically made by banks and other financial institutions, help entrepreneurs start and grow their small businesses. Entrepreneurs can borrow up to $5 million in SBA-backed loans. According to the SBA's 2023 budget request, the agency helped back $34 billion in loans in 2021. The SBA typically promises to cover between 75% to 85% of loan principals, making the loans less risky and more appealing for lenders.
As part of the new lending criteria, the SBA will:
- Allow lenders to make SBA loan decisions according to their existing practices for non-SBA loans, such as using credit scores, revenues, and equity to approve or deny loan applications.
- Reduce the cost and complexity of smaller loans by providing more flexibility.
- Removing cumbersome paperwork for lenders.
"These changes will expand the number of creditworthy business owners who can access SBA loans, including among women, minority entrepreneurs, employees purchasing a portion of a business from its owner(s), and startup small businesses," the SBA said in a statement.
The new standards will simplify SBA regulations and clarify how the SBA defines "affiliation," a term that has led to confusion over who qualifies for loans, by examining who owns the business. As part of this, the SBA will include additional protections so that loans are made only to small businesses, as well as remove some rules that have been considered burdensome for applicants.
The new SBA rules allow lenders to make loans of up to $500,000 through their own standard credit policies, with the SBA taking over prescreening tasks including fraud checks, according to The Wall Street Journal. As part of this lender expansion, the SBA said it will enroll new nonprofit lenders through a new Community Advantage Small Business Lending Company license.
In 2021 and 2022, 10.5 million people applied to start a new business, according to the SBA. However, certain demographics across the US have struggled to obtain affordable loans. As a result of bank branch closures, the SBA said there are over 1,600 banking deserts in rural areas. Fewer very small businesses have recently gotten loans, while startups have historically been viewed as risky by banks. Additionally, Black- and Hispanic-owned small businesses have a harder time securing credit than white-owned small businesses.
Only a small number of banks and credit unions make most SBA loans — half last year were made by just 20 lenders.
Some changes have drawn criticism from some industry leaders and politicians for potentially increasing loan defaults, given an uptick in lenders could lead more small-business owners to receive loans they can't afford to repay.
Three nonbank lenders will be licensed to make SBA loans above $350,000, which some industry experts believe could make riskier loans. The SBA has said the three additional lenders will be "regulated, supervised, and examined by SBA in accordance with the same oversight standards applied to today's successful and responsible" lenders.
Small-business owners also may have to pay more for loans, the Wall Street Journal reported. The SBA now allows lenders to charge a flat fee of $2,500 on loans up to $50,000, higher than the previous cap of 3% on loans of that size. This number rises to a maximum of $7,500 on a $150,000 loan, a jump from a $3,000 upper limit.
Still, the SBA said the new lending changes will have a significant effect on demographics that have historically struggled to secure loans, closing growing capital gaps and giving entrepreneurs more options.