SBA Expands its Lending Network to Spur Access to Capital for Underrepresented Founders

By Melissa Angell

MORE PATHWAYS to secure a government-guaranteed small business loan are about to come online. The Small Business Administration this week announced its plan to open its lending network, inviting in more types of non-bank lenders, including fintechs.

The SBA is lifting a 40-year moratorium that prevented the agency from bringing in new lenders to its flagship 7(a) and 504 loan programs, thanks to a final rule published Wednesday, April 12th. While the agency works with a number of banks, the SBA has constrained its lending network to just 14 nonbank Small Business Lending Companies (SBLC) since 1982.

The measure aims to close the access to capital gap that entrepreneurs in underserved areas face. By expanding its lending network, the SBA's expectation is that these additional lenders will extend loans--especially small-dollar loans--to the entrepreneurs who may have been overlooked by traditional financial instiutions.

Small-dollar lending is on the decline, the agency says. The amount of lenders originating 7(a) loans under $50,000 dipped by more than 40% in the past five to seven years, according to the SBA.

It's worth noting that fintechs and alternative lenders were previously eligible for SBLC designation before the final rule, but to do so, they'd have to wait for one of the 14 existing SBLCs to sell their license. Even with expanding the program, there's only three licenses up for grabs at the moment for for-profit institutions.

The SBA is also creating a new Community Advantage SBLC license for its nonprofit missionoriented lenders. The Community Advantage pilot loan program, which launched in 2011, extends loans between $50,000 to $250,000 to female, minority, and veteran entrepreneurs operating in underserved communities.

Should increased demand make more than three additional SBLCs necessary, the SBA might need more money. "That puts the onus back on Congress to say, if you want more lenders, more SBLCs in the program, you'll have to appropriate more resources to the SBA," says Ryan Metcalf, head of U.S. regulatory affairs at Denverbased Funding Circle, a small business loan platform.

Of course, that also begs the question: How will the SBA determine which three additional lenders to grant licenses to? https://www.inc.com/ melissa-angell/sba-expandsits-lending-network-tospur-access-to-capital-forunderrepresented-founders.html

Assuming that the program draws considerable interest from fintechs, Metcalf says the hope is that the SBA will adhere to a transparent selection process to determine who is the most experienced lender.

U.S. Small Business Administrator Isabella Casillas Guzman said that the rule changes demonstrate the Biden Administration's commitment to making lending more equitable.

"These rule changes demonstrate that commitment by providing governmentguaranteed lenders with all the tools they need to close the gaps that still exist for small businesses who need capital," Guzman said in a statement.

The final rule goes into effect on May 12.

Image: bizneworleans.com