SBA Administrator Outlines New Credit Scoring Model

June 11, 2014

pic-lending-money-compuerOn Tuesday, June 10, Administrator Maria Contreras-Sweet of the U.S. Small Business Administration (SBA) gave a speech at the Center for American Progress in Washington, D.C. where she outlined a new credit scoring model for all SBA loans up to $350,000. The new model combines the small-business owner’s personal and business credit scores via an online platform with the goal of making loan processing easier and thereby encouraging more banks to make SBA loans.

The new model is credit-based and takes into account a number of risk characteristics in deeming which business is creditworthy without analyzing a firm’s cash flow. Contreras-Sweet is directing that the new model be available for all SBA lending partners by July.

In addition to the new credit scoring model, Contreras-Sweet announced SBA One, a new electronic platform for submitting SBA loan documents. The goal of SBA One is to streamline and ease the paperwork burden associated with SBA loans, namely the flagship 7(a) program.

While the goal of easing paperwork requirements and expediting the loan process is welcome to any small-business owner who has gone through the cumbersome SBA lending process, it is not without some concern. The shift to a strictly credit scoring model could be problematic for certain businesses, specifically those which have not been in operating very long or those without adequate assets. The new model has been in operation in some of SBA’s smaller loan programs with a relatively high success rate when it comes to low defaults. However, expanding it to rely on the scoring model without including cash flow analysis on all loans up to $350,000 could ultimately hamstring SBA as the commonly-known small-business lender of last resort.

NSBA has been an outspoken proponent for SBA loans to help small businesses who otherwise wouldn’t get funding, as well as the importance of banks that still do character loans. Many successful firms with the ability to grow do not reflect their potential on paper and may not be deemed creditworthy absent a more detailed underwriting process. After the last five years where small businesses—who often secure business financing with a second mortgage—were particularly hard-hit, it is critical that financing not be limited only to those firms who fit one predetermined profile.

Please click here to read Contreras-Sweet’s full comments.