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SBA Refines Lending Process To Encourage Small Business Loans

Written by Ken Gaebler
Published: 7/1/2014

The Small Business Association will streamline the lending process for small business loans to accommodate underserved entrepreneurs' businesses. The new policy will take effect next month.

The Small Business Administration has created a total credit score model that will combine an entrepreneur's personal credit score with her business credit score. This model will be available to SBA lenders next months for loans that are $350,000 or less.

SBA Credit Score Changes

The new policy will reduce the time it takes to be approved for a loan by as much as 50 percent. This will be achieved by eliminating the need for certain financial analyses.

SBA Administrator Maria Contreras-Sweet said the agency has been testing and refining the model for more than a decade.

"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 initiative is another step in helping minority entrepreneurs who are more likely to be turned down for loans and are therefore hesitant to apply for fear of rejection, according to the Kauffman Foundation.

So far this year, the SBA has given 23 percent of its primary loans to minorities, 13 percent to Asians and three percent to African-Americans.

"This model is cost reducing and credit based. It ensures that risk characteristics--not socio-economic factors--determine who is deemed creditworthy." Contreras-Sweet said.

The new approval process may also prevent business owners of any race from taking an expensive debt from merchant cash-advance providers and other nonbank lenders. These quickly approved loans usually carry annualized interest rates at more than 100 percent, which is far more than the single-digit interest rates of loans backed by the SBA.

Contreras-Sweet believes the new policy will continue to assist minority-owned businesses considering 80 percent of SBA loan applications from African American and Hispanic business owners are for $150,000 or less.

However, not everyone is on board with the new policy. Senator Jeff Sessions (R-AL) said he's worried the government guarantees and lax oversight will lead to banks making bad lending decisions. Sessions said that simplifying the approval process for small loans might coax banks into making loans that business owners can't afford to pay back.

If you're planning on getting business loans from banks, make sure to do your research and understand exactly the terms that come along with the loan. This will ensure that you stay out of debt and your business continues to prosper.

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