New SBA loan rules announced
A few weeks ago, we commented on potential interest rate decreases in September. On September 18, 2024, the Federal Reserve announced that the federal funds rate would be reduced by 50 basis points.
In the wake of this decision, the Biden-Harris administration announced that the Small Business Administration (SBA) will adjust its rules for SBA loans. The administration noted that many small businesses will benefit from the rate cut, as they are often dependent on bank financing with floating rate loans. The SBA’s new rules will simplify the process for small businesses to refinance their existing fixed-rate loans to floating rate loans. Specifically, the SBA’s 504 Loan Program will be updated. This program provides loans up to $5.5 million for assets such as existing buildings or land, new facilities, and long-term machinery and equipment. The amendments to the 504 Loan Program will include streamlining the loan application process, expanding eligibility to more small businesses, removing the 50% cap on debt refinancing, and raising the loan-to-value requirement on certain debt refinancing.
Fintech lenders and the SBA
While the White House’s statement directly addresses the relationship of bank financing and SBA loans, the SBA published a list in 2020 of seven authorized fintech lenders. In April 2023, the SBA adopted a new rule that lifted the moratorium on licensing new Small Business Lending Companies (SBLC). In its summary of comments published with the rule, the SBA noted that it had received comments speculating about fintech lenders being awarded SBLC licenses. The SBA explained that non-depository entities, non-federally regulated lenders, and other nonbank entities have participated in SBA business loan programs for many years. The response highlighted that fintech and SBLC are not synonymous, but it did not affirmatively confirm or deny whether fintechs could receive licenses under the program.
Another comment topic referenced a 2022 working paper published by the Federal Reserve Bank of Philadelphia, which found that fintech small business lending platforms made more loans in zip codes with higher bankruptcy filings and higher unemployment rates when compared to traditional banks. However, the paper also found that the fintech lenders it analyzed used internal credit scores to predict future loan performance more accurately than traditional credit scoring and at lower cost to borrowers. It also concluded that fintech lenders enhance credit access to small business owners who are “underserved” by traditional lenders.
This year, one fintech lender received a small-business lending company license from the SBA, only to sell its U.S. operations and surrender the license within months following criticism from members of Congress over concerns of its financial strength and foreign ties. The SBA, however, has encouraged fintechs to extend 7(a) loans and provide capital for entrepreneurship.
We anticipate that the reduced interest rates, less restrictive rules for making SBA loans, and the SBA’s encouragement of fintechs to participate in certain SBA loan programs will create an increase in non-traditional lending activity. The SBA’s granting of additional licenses to fintechs and Congress’s view of this practice remains to be seen.
News and views
Recently, our own Chris Friedman, Alex McFall, and Shelby Lomax authored an article about Missouri’s new commercial finance disclosure law for Missouri In-House Counsel.
On October 10, through the National Association of Women Lawyers (NAWL), Husch Blackwell’s Susan Seaman will be moderating a panel on Adapting to Change: A Deep Dive into Regulatory Change Management. The conversation will focus on how financial institutions navigate regulatory changes and how businesses adapt and manage compliance with these inevitable changes. All are welcome to attend, and attendance is free for current NAWL members. If you are not a NAWL member, NAWL offers a one-time complimentary registration option. If you are interested in attending, you can register here.
Frank Swann, Chief Operating Officer of Beacon Consulting Group recently authored an article titled Accelerating Business Success using Data Analytics, Illuminate your Data in the International Factoring Association’s Commercial Factor E-Magazine. In it, Mr. Swann discusses how factors and other lenders can leverage datasets obtained through their reporting tools in a way that also drives business intelligence. In particular, the article discusses the benefits of centralizing data in a way that can be used to derive deeper business insights—describing this method as a “Single Source of Truth” (SSOT): [i]nstead of pulling data from multiple disparate sources—each with its own structure, update frequency, and access rules—the strategy of centralizing data first into a SSOT solves many foundational challenges and unlocks greater potential for advanced analytics and business intelligence.” We believe these insights are doubly important in light of the rise of AI solutions and data analytics that utilize machine learning and other forms of deep analysis to drive decision-making.
News you can bank on
Interested in more updates on the financial services industry? Subscribe and receive Husch Blackwell consumer financial services insights in your inbox.