There have been some new developments over at the Small Business Administration. The SBA’s budget for 2014 eliminates fees on some of the smallest loans it offers. This is an effort to get more loans to small-business owners.
The agency also announced plans to reduce the paperwork required from banks and borrowers.
“Small business is the heart of American business responsible for some 80% of GDP,” notes Sankar Krishnan, Global Client Engagement Head, Banking & Financial Services at Sutherland Global Services. “This move will help small businesses as the overall cost of doing business goes down even if by a trickle. This is important as a lot of small businesses owners who are sitting on the fence about whether to expand or not now have a good reason to grow their business. Also, it indicates that the regime is serious about enabling business. So it's a good thing,” she says.
The new changes will mostly affect the SBA's 7(a) guaranteed loans, which supports more than $27 billion in funding annually to small businesses.
The news comes at a time when the sequestration cuts this past winter cut 12 percent from the SBA's 2014 budget of $810 million. The budget however will now waive all fees for businesses seeking 7(a) loans of $150,000 or less. And beginning in October, the SBA will cut out loan-origination and servicing fees, as well as the 0.55 percent charged to the bank lenders each year to pay for their government guarantee.
“For business owners, it is elimination of a 2% fee on loan accounts, which totals $3k on maximum size loans, so that is impactful, since that must be paid upfront,” loan expert Charles H. Green, Charles Green Company, points out. “For lenders, it also waives the ongoing .55% annual fee contribution on the outstanding loan, adding that sum to their revenue, but more intentioned, it is added incentive to actually solicit loans in this size category, which an overwhelming number of banks choose to ignore or resist.”
The paperwork, which can be up to 100 pages, will be cut through an automation of the application process. “It shows that the SBA recognizes that it is behind the curve in technology and plans to do something about it,” says Rohit Arora, CEO and co-founder of Biz2Credit.com. “Automating the small business loan application process will make things quicker and easier. Loan officers will be able to make better-informed lending decisions in shorter amounts of time,” he adds.
Any changes that not only speed up the process but make it more affordable is good news for small business owners who often find themselves turned down by banks. “Although small business lending by big banks has picked up, it has yet to return to pre-credit crunch levels. Five years ago, big banks approved about 40% of loan applications, in part because they did not want to deny their own small business customers who banked with them,” notes Arora. “The post-Lehman collapse credit crunch changed all that, and approval rates plummeted to single digit levels during 2011. Increasingly, entrepreneurs looked for SBA lending for financing because the big banks turned off the spigot. Things have improved and big banks are approving about 16% of loan applications. It's better, but still nowhere near pre-credit crunch levels. Thus, SBA loans are still very important.”
Arora says he hopes the SBA continues to make improvements and forge ahead with new technology. The SBA is a government agency, which is typically slow to adapt to advances in technology,” he points out. “Many banks already accept eSignatures. This is something that the SBA needs to adopt quickly. People want to conduct business electronically--online banking and online loan applications. Increasingly, they want to do it via phone or tablet. The SBA must adapt to the changing realities of the marketplace,” he says.
According to Green, the move to digital has something the SBA has been pushing for for a while. “SBA has been dragging the small business banking community into the digital age for years, not the other way around. Left to their own devices, most banks would still be using pencil-completed spreadsheets.”