The U.S. Small Business Administration and Consumer Financial Protection Bureau each issued new rules earlier this year that aim to expand funding access for small-business owners, especially those in underserved communities.<\/p>\n
As of Aug. 1, 2023, updates to the SBA\u2019s rules will allow for new, nonbank lenders to offer SBA 7(a) loans, as well as update restrictive lending criteria. And starting in 2024, the CFPB will begin requiring lenders to provide the public with transparent data on small-business owner loan applications. Here\u2019s what this means for business owners.<\/p>\n
Small business lending companies, or SBLCs, are nonbank institutions \u2014 such as financial technology companies and alternative lenders \u2014 that are authorized to fund\u00a0SBA loans. SBLC licenses have been limited to 14 since the early 1980s, but the SBA has now added three additional licenses.<\/p>\n
The goal of this change is to encourage more lenders to offer SBA-backed loans and thereby reach more small-business owners. However, there are concerns that the SBA doesn\u2019t have the capacity to properly regulate additional institutions, which may allow\u00a0predatory lenders\u00a0to enter the market, according to Ann Marie Mehlum, co-chair of the Bipartisan Policy Center\u2019s Task Force on the Future of SBA and former associate administrator for capital access at the SBA.<\/p>\n
This could mean additional risks for small-business owners if predatory lenders are able to provide unfair or expensive loan products under the emblem of the SBA, says Joshua Miller, vice president of research and policy at Accion Opportunity Fund, a nonprofit community development financial institution based in California.<\/p>\n
He recommends borrowers be \u201cleery\u201d of working with any small-business lender that won\u2019t provide an annual percentage rate, as predatory lenders often try to hide the\u00a0true cost of borrowing\u00a0behind something like a factor rate.<\/p>\n
The SBA will also issue a new type of license called the Community Advantage SBLC to participants in the pilot Community Advantage program, as well as new nonprofit organizations. These licenses will represent a permanent continuation of the CA program, which has backed nondepository, mission-based lenders that target underserved communities, and that was previously set to expire in September.<\/p>\n
Also read: <\/strong>Three alternatives to a small-business loan<\/p>\n In addition to issuing new licenses, the SBA also updated its lending criteria. Instead of the previous nine factors used to determine creditworthiness, lenders can now use any one, or any combination, of three factors: the applicant\u2019s credit score or credit history, earnings and cash flow, and equity or collateral.<\/p>\n Lenders will also be allowed to underwrite SBA loans using the methods they use for their own similarly sized, non-SBA business loans. This change, in theory, will allow lenders to apply criteria that are the best fit for their communities and expand the pool of creditworthy borrowers. Miller, who suspects that the SBA\u2019s inflexible and lengthy lending criteria left many borrowers without access to capital, is hopeful that the update will do away with the \u201cone-size-fits-all\u201d approach to underwriting.<\/p>\n Also see:<\/strong>\u00a03 common reasons small businesses fail-and how to avoid them<\/p>\n The CFPB\u2019s finalized rule, which amends the Equal Credit Opportunity Act, will require financial institutions to begin reporting demographic data for all small-business credit applicants. This data includes ethnicity, race and sex, as well as minority-, woman- or LGBTQ+-owned business status.<\/p>\n The change is intended to expose gaps in capital access \u2014 particularly for\u00a0underserved markets\u00a0\u2014 and will apply to a range of lenders, including merchant cash advance companies, banks, credit unions and nondepository lending institutions. Part of the provision also states that underwriters cannot access this demographic data.<\/p>\n \u201cWe think that it\u2019s going to be great for small-business owners because so many underserved small-business owners currently don\u2019t have access to capital and they\u2019re completely invisible to the market,\u201d says Miller, who also sees this as a positive for lenders. By understanding where there are disparities, he says, lenders are better able to expand their market of eligible borrowers.<\/p>\nUpdated lending criteria<\/strong><\/h2>\n
More applicant data<\/strong><\/h2>\n