Business & Economy

SBA chief wants nonbank lenders to lower rates for small firms

Maria Contreras-Sweet, the head of the federal Small Business Administration, buys a toy for her granddaughter Elisa Sweet in Los Angeles.
Maria Contreras-Sweet, the head of the federal Small Business Administration, buys a toy for her granddaughter Elisa Sweet in Los Angeles.
Adolfo Guzman-Lopez/KPCC

Listen to story

Download this story 0MB

As alternative lenders take more of the small business loan market, the head of the Small Business Administration said Friday she is trying to persuade them to lower their interest rates, which tend to be higher - sometimes significantly so - than those charged by large commercial banks.

"The alternative finance channels are coming to the SBA and saying, 'will you help legitimize us, help promote us,’ and I’m saying, ‘not unless you have more rational rates,'" agency Administrator Maria Contreras-Sweet told KPCC during a visit to Los Angeles.

A Wall Street Journal analysis found that alternative lenders have steadily increased their share of the small business loan market in recent years, reaching 26 percent as of August. 

At the same time, the Journal found that the nation’s ten largest banks have lent significantly less to small businesses. In 2006 those banks lent a peak of $72.5 billion to smaller enterprises; in 2014 that figure dropped to $44.7 billion, a 38 percent decline, according to the paper.

The Journal noted that one online lender, Kabbage Inc., charges interest rates that average about 39 percent, vastly more than the 5 to 6 percent large banks typically charge small businesses with good credit.

The SBA has met with alternative lenders and is consulting "with several think tanks so that we can come up with some bill of rights to make sure that consumers [and small businesses] are appropriately protected on these loans," and to ensure "that the interest rates are a little more rational," said Contreras-Sweet.

The Small Business Administration does not issue loans; it provides guarantees to banks on behalf of firms that satisfy its criteria. 

Contreras-Sweet said her agency has taken three steps to make it easier for small businesses to get SBA-backed loans: It has zeroed out fees on loans under $150,000; it is recruiting more community banks and credit unions to participate in the SBA loan program; and it has improved its online application process to more readily connect borrowers with lenders.

Banks had told SBA that its online technology made processing applications for agency-backed loans "really cumbersome," said Contreras-Sweet, adding that lenders had complained about "the labyrinth of having to complete all this paperwork." She said one of the agency’s responses is called LINC (Leveraging Information and Networks to access Capital)

"It works a little bit like," said Contreras-Sweet. After a small business owner answers "a few basic questions, … we relay it to banks that have that same credit appetite." The result has been that "we’re making matches more and more often" - 20,000 "just in the last few months," she said, adding, "so we’re connecting now people that have historically had a really slow 'maybe' from a large institution."

The drop in big bank loans to small businesses, the Wall Street Journal reported, could be due to several factors: A reluctance by small firms to apply for long-term loans from big banks; these banks tightening their lending standards; and the banks opting to encourage businesses to take out credit cards to access bank funds. Credit cards cost less for a bank to issue than a long-term loan.

Contreras-Sweet spoke with KPCC at Miracle Mile Toys and Games in Los Angeles to encourage shopping at small businesses.

Store owner Christine Johnson said a bank turned her down two-and-a-half years ago when she was looking for $30,000 to open the store. So she scraped the funds together by selling her home, using credit cards and borrowing from relatives. 

Johnson wants to expand her store, which specializes in educational toys.

"My dream would be to open another store in another location," she said. "We are really interested in the concept of 'toy deserts,'" or lower-income neighborhoods that don’t have stores that sell educational toys and games.

Johnson dreads seeking another loan, but she was intrigued after hearing Contreras-Sweet talk about SBA-guaranteed loans. 

The SBA chief noted that the agency is backing more loans than ever. In the fiscal year that ended this past Sept. 30, the Small Business Administration guaranteed 63,000 loans totaling $23.6 billion - that was 22 percent more loans and 23 percent more loan dollars than in the previous fiscal year, according to the SBA.

Contreras-Sweet is a former member of the Southern California Public Radio Board of Trustees.