Biden’s plan for SBA 7(a) loans could boost fintech

License to lend

The Biden administration’s efforts to help small business owners get better access to capital could open up a big opportunity for fintech lenders.

Fintechs may gain a larger share of the SBA-backed loan market. The Small Business Administration will soon propose a rule change that could lift a 40-year moratorium on new licenses for non-banks to lend through its largest loan program.

• The number of non-banks, such as fintechs, that can offer SBA-backed loans through the roughly $35 billion annual 7(a) program has been limited to 14 since 1982. This has limited most lending to banks (which occasionally collaborates with fintechs and others). non-banks to obtain the loans).
• But the Biden administration hopes that raising the rate could make the loans more accessible, “especially in smaller dollar and underserved markets, where borrowers are most acutely locked out” of lending, as Vice President Kamala Harris said in a list of policy initiatives aimed at promoting racial equity in small business ownership, published October 4.
• The 7(a) loans—available for up to $5 million and backed up to 85% by the SBA—are designed to serve business owners who struggle to get other types of financing, but data shows long-standing disparities in lending based on race and income.

Fintechs think they can help. When the firms were able to write SBA-backed Paycheck Protection Program loans, an analysis by the Federal Reserve Bank of New York found that fintech lenders “likely served borrowers who otherwise would not have received loans,” often because they lacked existing banking relationships .

• “The fintech industry often serves minority-owned, low-to-moderate income, and the smallest of small businesses,” said Ryan Metcalf, head of public policy and social impact at online lender Funding Circle. “That’s the population SBA is struggling to reach through banks.”
• Sens. Tim Scott and John Hickenlooper last year proposed a bill to lift the moratorium on new SBA lending licenses, which was supported by think tanks such as the Bipartisan Policy Center.
• “If we are serious about expanding access to capital for those business owners and entrepreneurs who have historically lacked such access — and that is part of the original purpose of SBA financing assistance programs — then we should expand the scope of who can participate,” said Dane Stangler, Director of Strategic Initiatives at BPC.

This can be a long process. No rule has been proposed yet, and an SBA spokesperson declined to comment on when one might be expected. While fintech companies were credited with helping more businesses access PPP loans, the researchers found that some of these fintechs were responsible for a significant proportion of fraudulent loans. That could weigh on the decision to allow further expansion of SBA-backed loans to non-bank borrowers. Stangler said the rules should be carefully crafted, but the change needs to be considered “if our goal is to expand access to capital.”

– Ryan Deffenbaugh (e-mail | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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