The head of the U.S. Small Business Administration is on a mission to modernize the 62-year-old agency that guaranteed more than 52,000 loans to U.S. businesses last year.
Since becoming SBA administrator in April 2014, Maria Contreras-Sweet has been working to transform the SBA into an agency whose initials can also stand for “smart, bold and accessible.” Technology is the centerpiece of that effort, with three tools aimed at making SBA-guaranteed loans more efficient: LINC, SBA One and an automated SBA credit scoring model.
Contreras-Sweet is acting against a background of longstanding criticism of some SBA practices. The agency’s loan-guarantee process has been condemned as arduous and complicated by red tape. The average SBA loan takes three months to get approved, Contreras-Sweet told The Washington Post last month. Each of the three tools is designed to decrease the time it takes for businesses to get SBA-backed loans while increasing the total number of loans the SBA guarantees.
The SBA doesn’t make loans itself. The money for SBA-backed loans comes from private lenders, who get a guarantee from the agency that it will repay a portion of the loan if the borrower defaults.
LINC (Leveraging Information and Networks to access Capital) is a system within SBA.gov that matches small-business borrowers with SBA-approved lenders. Prospective borrowers fill out a 20-question application that gets sent directly to a pool of participating lenders. If a borrower’s application matches what a lender is looking for in a customer, the borrower will be notified within 48 hours, according to the SBA website.
The platform launched this month and is currently available only to a small subset of business owners: borrowers seeking Community Advantage Loans — loans of $250,000 or less from non-profit lenders — or 504 loans, which are specifically for real estate or equipment. There are currently around 130 lenders in the system that are qualified to grant those two types of loans, says Miguel Ayala, an SBA spokesman.
The SBA expects to widen LINC’s reach later this year by adding traditional bank lenders that will offer borrowers so-called 7(a) loans, which are more general-purpose.
Applying for a loan with LINC
When applying for a loan on LINC, businesses need to provide the following information, in addition to basic identifying information:
- Number of years in business
- Number of employees
- Estimated annual revenue
- Total amount of financing needed
- Purpose of the loan
- A written description of the current status of the business and why the business owner needs financing. (In 1,000 characters or less).
The application also asks whether the business owner has a written business plan and collateral to support the loan. Although businesses don’t need these things to complete the LINC application, having them will increase the likelihood of matching with an interested lender. If the business doesn’t match with a lender through LINC, the SBA will pair entrepreneurs with counselors to help them improve their application and business plan before applying again.
SBA One is an automated platform that lenders will use to submit loan applications to the SBA for a guarantee. The SBA plans to roll it out for lenders later this year, tentatively on April 1. It will eliminate the paper applications that lenders currently fax to the SBA, and is intended to decrease the time it takes for the SBA to approve loan guarantees. The SBA expects the new tool to encourage more lenders to make loans to small-dollar borrowers.
SBA credit scoring
The SBA’s credit scoring model reduces the time and money it takes for loans to get approved by automating part of the loan review process. Implemented in July 2014, it combines entrepreneurs’ business credit score and personal credit score, which the SBA traditionally considered separately. Lenders underwriting loans of $350,000 or less can use a business’s SBA credit score instead of submitting a cash flow analysis to the SBA, which is much more time-consuming.
Blending personal and business credit scores can be beneficial to entrepreneurs who make sacrifices in their personal finances to help their business stay afloat. For example, if entrepreneurs miss a payment on a personal credit card because they opt to use the money to make payroll that month, their personal credit score might take a hit. However, a good business credit score may average out their SBA credit score, and they’ll be more likely to get approved for a loan.
For more information about SBA resources and other tools to help your business get funding, visit NerdWallet’s Small Business Education Center.
Image via SBA.gov