In a recent Forbes column, the CEO of Lendio, posed the question: "Should the SBA Make Room for Alternative Lenders?" His argument was that banks aren't the only place small businesses can go for capital anymore and that alternative lenders have a "big role to play in the future of small business lending."
About the Author
Ami Kassar founded MultiFunding LLC, based near Philadelphia, which helps small businesses around the country find sources of financing. (MultiFunding at times accepts fees from lenders that agree to make loans.)
But in my opinion, the U.S. Small Business Administration -- a government agency supported by taxpayer funds -- and alternative lenders -- private lenders that take on higher risk loans in exchange for higher rates -- are opposite by definition. Thus, the idea that the SBA would guarantee loans by alternative lenders is akin to the great apples-versus-oranges debate. It's not a realistic or intelligent scenario to hope for.
The SBA's mission is to encourage small-business growth through its guarantee program, which encourages lenders to take on riskier loans then they ordinarily would. A typical SBA loan would have a 10-to-25-year amortization period and an interest rate of about 5%. With loans like this, small-business borrowers can keep innovating and keep expanding to the benefit of the overall economy.
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On the other hand, alternative lenders fill the gap for small-business owners when SBA loans are not an option due to weak financials, slow cash flow or poor credit. These non-SBA lenders give money at very high annual-percentage rates -- from 30% to as high as 200%. With rates like these, alternative lenders can take on much greater losses then SBA lenders, which allows them the luxury of using much faster and more limited underwriting than would be required for an SBA loan.
Because the SBA is dealing with taxpayer money, the rules and regulations set in place are for the benefit of the entire economy and all tax-paying citizens. If the SBA were to dole out loans as rapidly as alternative lenders do, taxpayers should, and likely would, jump up and down screaming because of the amount of risk that they would be exposing taxpayer money to.
It's easy for alternative lenders to fantasize about a scenario in which the SBA embraces them and adopts their swift underwriting process, which at times can be based on a mere three bank statements and credit check, in exchange for lower rates on quick loans backed by a guarantee.
But it's not realistic. The SBA should never, and could never, back what alternative lenders do.
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And if alternative lenders were to provide funds at SBA rates, typically ranging from 5.5% to 6%, they would be dead in short order as well, because of their high loss rates. While alternative lenders don't publish their loss rates, I have been told of default rates running from 6% to 10%.
Although the likelihood of these worlds ever meeting and comingling is extremely low, there are steps that both sides could take to come a little closer to each other.
For example, the SBA could look for opportunities to become more streamlined by ridding itself of outdated rules that bog down the approval process. At the same time, if alternative lenders could create transparent and clear pricing that business owners can understand based on APRs, as SBA lenders do. This would allow owners to properly compare apples and orang
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