An Innovative Lending Fix for Small Businesses and Banksby
When Kelly Kolterman went to Bank of America for a small business loan late last year, they sent her to her local Small Business Development Center. The owner of Redondo Beach (Calif.)-based JalaClothing, which specializes in yoga-inspired apparel, worked with the SBDC to develop a loan package and then got referred from one banker to another. Finally “one of those bankers knew of a friend who was involved in the startup” of SmartBiz, a six-month-old company that bills itself as the nation’s first online SBA loan application.
For Kolterman, stumbling onto the company’s website was like finding the Holy Grail: “It was awesome, fast, convenient, and they offered great rates,” says the entrepreneur, who applied, qualified, and got $25,000 for clothing production in less than a month. She was particularly impressed with the website, which features a sliding scale that shows exactly what the interest rate, term, monthly payment, and fees are for different loan amounts.
“We want to be extremely transparent with the borrower, so we list our 4 percent upfront fee and show how it is taken out of the disbursed funds that go into their bank account,” says Evan Singer, general manager at SmartBiz. The company, in partnership with Sacramento-based Golden Pacific Bank, specializes in SBA loans ranging from $5,000 to $150,000; terms are 10 years at 6 percent to 8 percent interest, with no prepayment penalty.
SmartBiz boasts an online application process that requires fewer documents—it forgoes the traditional business plan and income projections, for instance—and says it can deliver conditional loan approvals in 30 minutes and fund loans inside a week. The algorithm it developed includes baked-in SBA underwriting criteria, Singer says.
The difficulty of developing an automated process has kept companies from making such options available online. “It’s hard,” Singer says. “What we are very good at is taking complicated lending processes and making them easy with technology. Our algorithm contains triggers that can automatically decipher the candidates that are qualified for the SBA loans.” This means companies that have been in existence for at least two years, have adequate cash flow to support loan payments, have no liens, and are in good standing with their creditors. Under SBA guidelines, collateral is required for loans from $25,000 to $150,000; under $25,000, no collateral is required.
If SmartBiz catches on, it has the potential to help both established small business owners desperate for low-cost capital and banks seeking new customers.
That’s because SBA-backed loans are little-used. While they provide long-term, low-interest debt, a first-quarter small business survey from Capital One Financial found that only 9 percent of small business owners said they had tried to get one, although 79 percent said they were aware of their existence. Nearly three-quarters of those who had applied called the process “very or somewhat” complicated; traditional loan funding often takes 60 days to 90 days.
From a bank’s perspective, the small income potential and high labor cost of underwriting an SBA-backed loan worth less than $150,000 can send loan officers diving under their desks to hide when entrepreneurs come through the door, Singer jokes.
In recent years, the scarcity of these loans has meant that small business owners must turn to nonprofit micro-lenders or to non-bank loans: Alternative lending topped $3 billion last year, double the total for SBA-backed loans worth less than $150,000. While they are relatively easy to obtain and quick to fund, such alternative commercial loans typically come with hefty interest rates.
This year, SBA loans under $150,000 are making a comeback: Loan volume stands at $955 million from October 2013 through the end of April—more than 25 percent ahead of the same period a year earlier. That’s probably due in part to SBA’s decision to drop its fees on loans of that size.
SmartBiz may get some credit, too: As of this month, Golden Pacific Bank was the country’s top participant in a program that provides SBA loans of up to $25,000. Golden Pacific now commands 20 percent of that loan market nationwide; it processed more than $23 million in applications last month, says Virginia Varela, the bank’s chief executive officer. SmartBiz has recently teamed up with California Business Bank, Yahoo!, Xero, and EPay as well, so it can also offer its online loan application to their customers.
SmartBiz came about after Varela, a long-time regulator with the Federal Reserve Bank of San Francisco and the U.S. Treasury, met the founders of Better Finance, the San Francisco-based financial technology company behind SmartBiz. Founded in 2009, Better Finance is a shareholder in Golden Pacific Bank and offers a leasing plan for consumers’ purchases of smartphones and other high-ticket tech items.
“Community banks tend to be conservative,” says Varela. “This is highly innovative and outside of the box. I know that there’s a lot of hesitancy with new, unproven products, but I believe this is the best way for community banks to survive. That’s how we’ll stay competitive.”
The new loan application is putting her bank, which has $130 million in assets, on the map. She says she’s gotten phone inquiries from executives at some of the largest banks in the country asking how the online application works, and she’s been approached about appearing on banking panels at industry conferences.
It will take some time to evaluate how successful SmartBiz is. “We’re balancing between ensuring the loan underwriting is properly done from a risk perspective and making sure the money that’s so needed in our economy right now gets out there to the little guys,” Varela says.