The Biden administration's efforts to help small-business owners get better access to capital could open up a big opportunity for fintech lenders.
The Small Business Administration will soon propose a rule change that could lift a 40-year moratorium on new licenses for nonbanks — including fintechs — to lend through its largest loan program. The plan was revealed last week in a list of policy initiatives from Vice President Kamala Harris aimed at advancing racial equity in small-business ownership.
The change could open the door for fintechs to write loans backed by the SBA 7(a) program, a roughly $35 billion annual program that offers loans up to $5 million to small businesses, backed up to 85% by the federal government.
The program is mostly limited to depository institutions or banks. Some non-depository lenders can write the loans through a special license overseen by the SBA. But the number of “small business lending company” licenses has been capped at 14 since 1982, meaning lenders that wish to participate must either bid for one of those licenses or partner with a bank on the loans.
The 7(a) loans are designed to serve business owners that struggle to get other types of financing, but data shows long-standing disparities in the loans based on race and income. Harris' announcement on Oct. 4 said the administration hopes that having more lenders will make the loans more accessible, "particularly in smaller-dollar and underserved markets, where borrowers are most acutely shut out of” lending.
“For too long, the small business ecosystem in underserved communities has struggled to keep up with better funded businesses and entrepreneurs in more prosperous communities,” Harris said.
Fintechs believe they can help. A study of lending data from Funding Circle and LendingClub published last month by the Bank for International Settlements found fintech lenders had the potential to allow “small businesses that were less likely to receive credit through traditional lenders to access credit and to do so at lower cost.”
"The fintech industry is often serving minority-owned, low- to moderate-income, and the smallest of small businesses," said Ryan Metcalf, head of public policy and social impact at Funding Circle. "That's the population the SBA is struggling to reach through banks."
When the Paycheck Protection Program was created in response to the economic hardship brought on by the pandemic, the SBA cleared fintech lenders to originate loans for the program. An analysis by the Federal Reserve Bank of New York found that fintech lenders "likely served borrowers who would not have received loans otherwise," often because they lacked existing banking relationships. About 1 in 4 Black-owned firms applied to fintech lenders, more than twice the rate of white-, Asian-, and Hispanic-owned firms, according to the New York Fed.
"If we're serious about expanding access to capital for those business owners and entrepreneurs who have historically lacked such access — and that is part of the original purpose for SBA funding support programs — then we should widen the scope of who's able to participate," said Dane Stangler, director of strategic initiatives at the think tank Bipartisan Policy Center.
The Bipartisan Policy Center has convened a panel of bankers, fintech leaders, and small-business owners to study how the SBA can best serve small-business owners. While that panel has not yet put out any formal recommendations, the BPC supported a bill last year from Sens. Tim Scott and John Hickenlooper to lift the moratorium on new SBA lending licenses.
But while fintech companies were credited with helping more businesses access PPP loans, researchers found that some of those fintechs were responsible for a significant share of fraudulent loans — which could weigh on the decision to allow further expansion of SBA-backed loans to nonbank lenders.
"There are good actors and bad actors in the fintech ecosystem," Stangler said. "But we definitely think that this particular step is something that should be considered. Very carefully crafted, because it has some significant regulatory implications, but genuinely considered if our goal is to expand access to capital."
One major question will be how the SBA structures the change. No rule has been proposed yet and an SBA spokesperson declined further comment on when to expect one. Bill Briggs, a former SBA official, told Inc. that the process could take up to a year from when the rule is first proposed.
If the rule change is approved, fintech companies will still need to weigh the compliance costs and resources needed to pursue a lending license. Metcalf said there is strong demand both from small businesses and investors to fund the loans, particularly for fintechs that can help reach more business owners and offer easier ways to run through the application process.
“There are additional levers to be pulled to reach more populations,” Metcalf said. “Increasing the distribution channels is a step in that direction.”