Innovative opportunities for businesses to access 7(a) funding
- January 16, 2023
SBA moratorium on 7(a) non-depository lenders lifted
The Small Business Administration (SBA) is proposing to remove the limits of non-depository companies, referred to as small business lending companies (SBLC), that can make loans under SBA’s Section 7(a) program and also create a new mission-based SBLC type.
By lifting the ban on new SBLCs, more lenders are now eligible to join in the 7(a) Loan Program and provide additional resources of capital to US small businesses. This will unlock a world of possibilities for entrepreneurs and help stimulate growth within our country’s economy. By embracing innovative practices and pioneering strategies, organizations can now provide credit to a broader population of borrowers. By devising cost-effective financial solutions that are easily accessible, institutions have revolutionized the concept of what was once deemed impossible in past eras.
What is SBA 7(a) loan?
The SBA 7(a) loan program is a widely-distributed, utilized source of financial aid for small businesses. The SBA loan program is named after the 7(a) section of the Small Business Act, providing bank guarantees to lenders that collaborate with small businesses. Instead of directly working with SBA, business owners must partner up with an approved lender in order to access this type of financing. The primary function of these loans is to provide financial support for entrepreneurs who cannot acquire funds from other means.
Fintech and other financial partnerships
To enable fintech companies to become fully involved in the SBA’s programs, the SBA could incentivize bank-fintech partnerships. This would give fintechs an option to be part of the program while still having time to learn about and adhere to its complex standard operating procedures. The model for this potential new system can be based on that of the existing mentor-protégé setup used by the SBA in federal contracting work; this way, those with a vested interest in achieving success will have access to necessary resources along their journey.
Through responsible innovation in financial services, the potential to increase access to fair and affordable credit for small businesses is immense. Partnerships between local banks, minority depository institutions, community development financial institutions and mid-size regional or large firms with technology companies can provide customers with efficient and convenient services they desire. This could be a major step forward towards leveling the playing field across different sectors of finance.
Potential taxpayer threats
In response to potential threats taxpayers may face from expanding 7(a) loans to small lenders, the Small Business Administration (SBA) has proposed a new plan – streamlining the loan authorization process through SBA’s E-Tran loan processing system. This will help ensure that banks maintain their current demand for 7(a) loans and uphold existing bank regulations.
In conclusion, we believe the SBA should protect their appeals process to give organizations whose applications were refused by a Lender, CDC, Intermediary or SBA the chance for meaningful consideration and more consultations with the relevant agency. To guarantee SBA 7(a) program access is only granted to entities that meet specific risk management and operational standards, the SBA must adjust both access and functionality according to individual entity needs. Moreover, regular monitoring of these entities’ risk profiles must take place in order to ensure they remain compliant with scheme requirements. This will help protect against any potential risks or changes in operations that may arise during the course of business activities.
Thanks to innovative technology companies providing access to more affordable credit options than traditional loans, small businesses now have the opportunity to gain access and reap the benefits of these cheaper alternatives. Through participating in SBA’s 7(a) program, lenders are able to offer up to $5 million worth of capital for-profit enterprises. This guarantee system provides 85% coverage on loan amounts lower than 150k and 75% higher than that amount – allowing such entities a capped rate at 14%, until recently.
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