Is the SBA In Need of Better Risk Assessment Tools?

SBA Risk Assessment Tools

Earlier this month, a number of studies pointed toward positive, consistent growth in small business lending. The year-over-year figures are up and the Small Business Administration has remained a valuable ally to lenders that need additional support tempering their risk.

The Washington Post interviewed Eagle Bank COO Michael Flynn, who explained how the SBA is able to support small business lenders.

“If we have a loan application that’s on the edge, if you can get the SBA guarantee, then that becomes a transaction we can do,” he told the Post. “Without that guarantee, some of our loans would probably never have been approved, and that’s the real advantage of the SBA programs.”

But the news isn’t all positive for the SBA.

The Government Accountability Office announced last week that 40 percent of loans extended to franchisees in one anonymous chain between 2000 and 2011 fell into default, costing the agency $1.5 billion. And this unnamed franchise isn’t the only borrower to experience these circumstances.

Bloomberg Businessweek notes that the SBA’s inspector general found in July that the agency “had not implemented a program or process to effectively monitor risk in its loan portfolio.”

In the case of the franchise identified by the GAO, the lender itself may have been culpable in securing funding that the franchise owner would not have otherwise been able to secure. But often, it’s the borrower that is unscrupulous when applying for a loan, whether that means withholding certain information about its credit history or in some other way deceiving the lender.

To prevent such practices, and to lessen the likelihood a borrower will default, lenders must use loan management software that can be customized to fit their needs. Risk assessments are not one-size-fits-all, and if lenders want a full picture of the borrower to whom they are extending credit, they need to aggregate as much information as possible.

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