In an effort to assist minority entrepreneurs to borrower funds for business ventures, the federal government recently announced it would be streamlining its lending standards in connection with Small Business Administration (“SBA”) Loans. In order to increase the percentage of loans made to African American business owners, the SBA will no longer require lenders to perform an analysis of cash flow or debt service coverage on loans of $350,000 or less. The changes will begin starting July 1, 2014 and according to the SBA, these modifications in qualifying guidelines are aimed at simplifying and streamlining the lending process in an effort to incentivize banks to do more small-dollar loans in order to get more loans into the hands of traditionally underserved entrepreneurs.
We at Capstone Capital Group, LLC find this change in criteria alarming. As a private financial institution that assists its clients in accelerating their cash flow through Factoring accounts receivable it is our goal to increase access to capital for all qualified business borrowers. However, providing access to capital to unqualified borrowers who do not have the ability repay will ultimately cause further problems down the line. Once these no cash flow loans begin to default, Congress will have to act because taxpayer money is at stake. The laws they ultimately will put in place will end up hurting small businesses access to conventional bank financing as Dodd-Frank has.
If history has taught us anything, it is that relaxing underwriting guidelines in an effort to extend loans to “underserving” individuals is not necessarily a good idea. Like sub-prime commercial lenders in the past that offered small balance, stated income/stated asset with no debt service coverage, commercial loans to business owners who would not necessarily qualify for traditional financing, the government may be going down a dangerous slope with its new underwriting guidelines on SBA loans aimed at what they term as “underserved”. The government lowering its lending standards to spur loan demand is a recipe we have seen all too often in this country, which ultimately has led to defaults and often times foreclosures.
Recent events in the student loan market support the ultimate end game using relaxed standards. Prior to the government handling student loans they were administered and underwritten by banks. Now college graduates are graduating with mountains of debt because the ability to repay is not taken into account. The tax payers will ultimately bear the burden of paying all of these poorly underwritten student loans back as more and more graduates are under employed and cannot pay their debts.
Further, and even more unsettling, is that commercial banks aren’t given similar consideration as they are prohibited from doing the same under Dodd-Frank. As much as the government may believe loosening lending standards on SBA loans to spur lending to the undeserved is a good idea, these loans may very well be like the recent student loan crisis the government has created.
Capstone Capital Group, LLCprides itself as a factor whose objective is to help its clients grow. As an alternative, we offer purchase order factoring, single invoice factoring which can provide you with the capital you need to accelerate your cash flow and get your business back on track without undertaking debt you are unable to repay.
For more information on how Capstone can help, please email [email protected] or call 347-821-3400 to speak with a representative today.