In recent years, Small Business Administration (SBA) loans have gained a reputation as being more difficult to receive and involving more red tape than many of the other emerging financing options, such as peer-to-peer lending. As a result, the SBA announced a new "streamlined" process for its most commonly sought loan, the the SBA 7(a) Loan.
According to the Wall Street Journal, the changes were made to assist minorities in their efforts to borrow funds for new or existing businesses. Previously, the WSJ reported that black business owners received just 2.3 percent of the roughly 54,000 loans made by the SBA in 2013.
In order to address this issue, beginning the first of July, the SBA is no longer required to to perform an analysis of debt-service or cash flow on loans up to $350,000. SBA head Maria Contreras-Sweet was quoted by the source explaining the action.
"The changes will simplify and streamline the lending process, which will incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs."
The SBA's lowered standards could have wide-ranging effects on the business-lending industry, and may prompt similar moves by private banks in order to maintain competitiveness. According to the Financial Times, commercial and industrial lending represent a fifth of all loans made by Bank of America, JPMorgan Chase and Wells Fargo.
Bank executives interviewed by the source describe the current US business lending market as "frothy," and draw parallels to the climate in 2006 where there was more credit available than borrowers.
To prevent a repeat of the easing of standards that led to the recession almost ten years ago, lenders should invest in application processing software that is capable of drawing from multiple data sources in order to protect themselves and the borrower.