The U.S. Small Business Administration is rolling out a new business credit score that lenders can use to assist in underwriting small business loans.
The move is part of a larger effort by the government agency to make its tools and services more accessible to entrepreneurs and small business owners.
The new SBA business credit score, rolling out in July 2014, combines personal and business credit scores. Known as the FICO SBSS score, it is something that was already in use by banks and is used to pre-screen SBA 7(a) loan applicants.
The FICO SBSS score will be used for term loans, lines of credit, and commercial loans up to $350,000. Unlike the FICO score, which goes up to 800, the SBSS Score will range from 0 to 300, with a minimum of 140 needed to pass pre-screening. Personal credit score will factor in, but a history of timely business payments to vendors will help as well.
The agency has been developing the scoring platform for use with 7(a) loans for almost 10 years, with the goal of relying on this combination of personal and business credit scores over onerous examinations of a company’s potential cash flow.
The SBA hopes this new scoring system will reduce reliance on socio-economic factors in determining creditworthiness, and factor in true risk assessment in greater degrees. After all, it is the risk profile of borrowers that primarily concerns lenders.
The new scoring system is part of a more broad-ranging approach to make loans more easily available to entrepreneurs. The SBA appears to be joining the 21st century in launching SBA One, which is touted as a user-friendly interactive lending platform designed to streamline the underwriting and processing process. That’s right—they are doing away with faxes and using electronic document uploading.
The hope for this program is that more small business owners will obtain more loans, which will ultimately stimulate the economy and create jobs. With a $100 billion portfolio already in place, every dollar counts in an economy that saw a 1% decline in GDP in the first quarter of the year.
There are concerns, however.
The SBA’s administrator, Maria Contreras-Sweet, makes it clear that part of the plan is motivated by a desire to increase lending to minorities. Black business owners only received 2.3% of SBA loans in 2013, down from 11% in 2008. The removal of cash-flow analysis and debt service assessment is akin to the removal of income verification during the height of the mortgage fiasco. In an effort to make it “easier for everyone to own a home,” risk assessment became more lenient, loans were made to people who never should have had a loan … and it resulted in disaster. Is this an analogous situation? Time will answer that question.
Image of business owner via Shutterstock.