Innovating SBA’s Small Business Lending
Stathis Theodoropoulos, Principal of Firefly Lighting LLC, NLC New Jersey
Small Businesses are the backbone of the American economy. They may not have the glitz and glamor that come with being a Fortune 500 company, but small businesses are what make the American economic engine hum. According to the U.S. Small Business Administration, there are 28.8 million small businesses in the United states, which accounts for 99.7% of all business in the US and 56.8 million employees. I too am a small business owner, 1 of the 28.8 million in our country. I am also a Millennial that started my business in the aftermath of the 2008 Financial Crisis and during the past 2 years of running my company, I am excited about where I am going but I know I am confronted with big challenges ahead as I scale my business.
The greatest challenge in front of me and growing my business is working capital; and this is not unique to me either. According to an Ernst and Young report “The Millennial Economy
National Public Opinion Survey”, 42% of Millennials say the the biggest obstacle to starting a business is capital. And that obstacle is compounded by the fact that Millennials have a median net worth of $6,676, with a median debt of $45,300. These facts on net worth and debt really paint a grim picture of the financial realities that Millennials have to live with, and ultimately making personal and professional goals harder to attain.
But not all is lost when it comes to receiving funding to start and scale a business. In today’s lending landscape you have a variety of different channels to receive funding, from the traditional SBA backed loan from a bank, to an online financial lender like Kabbage. From talking to other entrepreneurs and from reading a variety of publications, Millennials are more and more leaning towards online financial lenders due to their ease of the application process, and also because in certain cases because of the lower standard for credit worthiness from their end.
I, myself, am in the exact phase where I am exploring different options when it comes to gaining working capital in order to scale my business. Just like many Millennials, I have been exploring my options, and with exploring the different options, I came across different frustrations. Traditional banks would not consider me, SBA backed lenders had a long and complicated application process and the newer online venders cost too much to borrow. But the two types of lenders stood out to me, SBA backed loans and Kabbage, an online lending service. SBA backed loans provide an opportunity for less established businesses to receive funding because bank’s downside is protected due to SBA backing all loans, and Kabbage is more user friendly and utilizes quickbooks and your online bank statements to come up with their decisions.
Going through this process has really lit a light bulb in my mind if we can do this process better. My idea on how to innovate the way banks that lend SBA backed loans is by using online loan marketplace, where one application could be used to apply to multiple banks and and applications could be move innovative in their application process.
The SBA Business Loan Marketplace would look like this. A prospective applicant would set up an SBA user profile with their business and personal information. Once a profile is created, the applicant can start the loan exchange process. The process would begin with a questionnaire to determine what type of business loan is more suitable to your business financial needs. Many entrepreneurs just dive into the loan search without having much direction of what type of loan makes sense for them. By going through a guided process initially, you can focus on the products that make sense for you, and not apply for loans that do not serve you. Once you have an understanding of the product you need, you can then move forward to the next step to see which banks in your region and community offer the SBA backed loan you need, and then you can select as many banks as you want to apply to. The next step, the application is where we can really be innovative.
Traditionally, when you wanted to apply for a few loans, you would need to apply for each loan individually which can be a long and cumbersome process. Applying within the Marketplace framework will only require one application for all the loans you apply to at a specific time. This way, you can have banks compete for your business without having to go through large amounts of paperwork each time.
Another way to innovate is by rethinking how and what data is collected when you submit your application. A vast majority of all the bank loan applications require the same information. This includes company and owner information, financial information, projections and a business plan. But with an innovative online approach, we can get the vital information bankers need by making the process easier. For instance, the initial company information would automatically be populated since an SBA profile would be created first. When you send out the first batches of applications, all you need to do is to review and update that information as needed.
Another innovation is taken from Kabbage, an online finance company that approved me for a line of credit. A process that took all of 15 minutes. A key innovating process that they use is that they download the data from your bank account and booking software (Quickbooks), and use that data in their decision making process. Having SBA use a similar process would allow them to receive verified data and would only take the applicant a few minutes to provide the information needed. This process eliminates unnecessary time and removes hurdles for banks to make quicker and better informed lending decisions.
An argument I heard on this type of innovation to lending would be the higher risk SBA would be taking due to this type of application process, and their fears come from their duty to be accountable to the American taxpayer. That duty is justifiable, but this type of innovative process does not jeopardize that type of accountability. If anything, it strengthens the application process by getting verifiable data, and it ensures we remove the obstacles to businesses that are primed for growth.
But even from careful movement from the Federal government of the United States, there have been signs about the need and inevitability to adapt to the changing landscape of lending and support for our nation’s entrepreneurs. The Office of the Comptroller of the Currency said it “would move forward with considering applications from financial technology (fintech) companies to become special purpose national banks.” This is recognition of the importance of fintech companies with the Office of the Comptroller of the Currency also stating that, “First and foremost, we believe doing so is in the public interest,” Comptroller Curry said. “It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers and help families and businesses take more control of their financial matters.” This move from the Office of the Comptroller of the Currency shows the understanding and need to start laying down the foundation for a vibrant fintech community, which include companies like Kabbage and other start ups. And as the Office of the Comptroller of the Currency alluded to, a vibrant fintech community can only help US businesses.
Ultimately, being able to assist businesses that are owned by Baby Boomers to Millennials could be the added fuel needed to have our small businesses play a stronger role in growing our economy and bringing jobs to our local communities. But this will only happen when we simplify the process and introduce competition for business loans. Having the different stakeholders from business owners, banks to the US Government working together to help create innovation and effective regulatory framework to bring about changes in a responsible is great first step. But ultimately disruptive technologies and innovation in this lending space will be key in truly unleashing the power of our nation’s entrepreneurs and small businesses. SBA needs to be at the forefront and lead this change. Having the SBA create a Business Loan Marketplace is an important tool that they can create to empower entrepreneurs and help drive the economy for years to come.
i.“Small Business Profile”, SBA Office of Advocacy 2016 https://www.sba.gov/sites/default/files/advocacy/United_States.pdf
ii.“The Millennial Economy National Public Opinion Survey”, September 2016, “http://eig.org/millennial#findings”
iii.“OCC To Consider Fintech Charter Applications, Seeks Comment”, December 2, 2016, “https://www.occ.treas.gov/news-issuances/news-releases/2016/nr-occ-2016-152.html”