SBA Loans to Minorities Grew 28% Since FY 2009

By Charles H. Green

Each week the U.S. Small Business Administration publishes information about the loan volumes it has approved for participation through either the 7(a) loan guaranty program  or the 504/CDC loan program. This information tracks the dollar and numerical statistics of approved financing volumes throughout the SBA’s fiscal year, which starts on October 1 annually, as well as demographic information of the small business owners that benefit.

SBFI has been tracking this loan approval data over the past year to develop trend SBFI_moneytreeanalysis, and as part of that effort, has been developing graphical illustrations to map trends in the various demographic categories that are tracked by the SBA. While we follow overall loan approval volumes monthly, for the demographic categories, the information is compared year-over-year. Hopefully, you’ve already seen some of these results in our Capital-Views pages, where SBA loan approvals for rural, veteran and women borrowers have been illustrated.

This time our attention is turned to the distribution of SBA loans to minority borrowers, and learning more about how they have been trending over time.

As a group, minority business owner’s SBA participation has grown since 2009 from 32% of all SBA loans to over 41% in FY 2014, a 28% gain. But this growth has varied widely within different ethic categories, as those as “Asian” rose from 16.3% of the total dollar sum of SBA loans in FY 2009, to 20.5% of SBA loans in FY 2014. During those same years, “Black” business owner’s share of SBA loans fell from 4.7% to 1.7%, while “Hispanic” business loans rose from 4.6% to 5.4% during the same period.

Certain categories were combined in our analysis due to space limitations and relative low reported lending volumes in these categories. For example, ‘Hispanic’ and ‘Puerto Rican’[i] categories were combined into one “Hispanic” category; ‘American Indian,’ ‘Eskimo or Aleut,’  ‘Multi-Group’ and ‘Undetermined’ categories were combined into “Other.”

In FY 2009, the “Other” category represented 7% of all SBA loans, which rose to 13.7% by FY 2014. The largest sub-category in our combination was “Undetermined,” which may have reflected a growing number of borrowers who refused to disclose their ethnicity, or participating lenders that did not gather the information.

Read more at Capital-Views.

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[i] Apparently the SBA made this same combination of Hispanic and Puerto Rican borrowers, since FY 2009 is the only year that approved loan balances are reported.

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Technology Revolution in Finance is Upon Us

By Amaresh Gautam

Technology has changed our life in remarkable ways. Can you imagine waking up in America 100 years ago, in a house without a computer, smart phone, internet connection, microwave or even a refrigerator to store fresh food in from the field? For that matter, imagine milking a cow in the morning to have fresh milk! But one sector that hasn’t been exactly revolutionized by technology is finance.

Sure, they now have your data backed up on systems rather than in filing cabinets and they In-Depth Analysisuse sophisticated software, but the basic banking products really haven’t changed that much. Savings account and demand deposit accounts offer the same kind of benefits they did 100 years ago. Most of the innovation in finance has been incremental at a snail’s pace, rather than disruptive, and it’s only been in the most recent two or three years that financing innovations have really begun.

This recent wave of innovation is finally taking hold in finance, with new startups coming up with financial products that are technology enabled, like payments applications and lending platforms. And don’t worry that these unlikely products/services will make banks go out of business. In fact many of these new products will be complimentary to traditional banking offerings and will increase their market, as they affect the financial landscape in multiple ways.

First, these innovators will cut costs and improve the quality of financial services. These cost savings will be passed to the customers thus setting new expectations. Second, these new players will have data driven and technologically enabled ways of assessing risk. For example usage of social media reviews, machine learning and the track record of using vendors can all be used to arrive at some sort of credit score. Third, by adding diversity in distribution to the lending landscape they will make it more stable.

With this business model centered in a technology-enabled channel, financial firms are likely to be much less geograhically concentrated than the business of brick and mortar firms. Moreover they are likely to avoid two risks of traditional financial institutions–mismatched maturities and leverage.

If these technology companies succeed in becoming bigger than the traditional institutions, finance will be transformed in a major way. Borrowers and lenders would be matched directly using technology and leverage in economy would be greatly reduced. But before that happens, technology companies will force traditional institutions to cut costs, and the clients will emerge as the winners.

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OnDeck Steps in Where Banks Shy Away

By Ravinder Kapur

Online lending to small businesses is a nascent industry which has an outstanding loan capital of $10 billion, compared to $700 billion in credit assets held by the banking sector. But this alternative lending source is growing fast and OnDeck Capital, one of the major players in this rising technology-dominated sector, is expanding its portfolio exponentially. How? By exploiting its non-traditional business model, which relies on speed and  innovative credit appraisal techniques than those used by banks.

A recent article in reported that OnDeck has made loans to more than 30,000 Websmall businesses since 2007, and in 2014 originated loans totaling $1.2 billion, an increase of 152% from 2013. In the first quarter of 2015, the company’s origination volumes increased to $416 million, reflecting 83% growth over the prior year. The average APR that the company lends at is estimated 51.2%, which is a reduction of 10% from the earlier year.

An important reason for the rising volume of loans made by online lenders like OnDeck has been the reluctance of banks to extend finance to small businesses since the financial crisis. This reluctance stems from several reasons including the fact that, for banks, the transaction costs to service a $100,000 loan are the same as for a $1,000,000 loan. This makes loans to small businesses by banks an expensive proposition.

Since the financial crisis, banks have tightened credit underwriting to small businesses, which has resulted in lower lending to this sector. As reported in a July, 2014 working paper by Karen Mills, former SBA Administrator and currently a senior fellow at Harvard Business School, small business loans on the balance sheets of banks are down by 20% since the financial crisis, while loans to larger businesses have risen by 4% over the same period.

While small businesses may need weeks or even months to access funds when sourcing them from a bank loan, OnDeck tries make money available within a day through its online platform, which to them is a competitive advantage. The loans and lines of credit are uncollateralized and based on the subject business having a proven revenue track record, usually a minimum of $100,000 for at least one year.

Noah Breslow, Chief Executive of OnDeck has carved out a niche for the company in the low value segment of small business loans. OnDeck’s average loan size is $44,000 and small business borrowers are increasingly turning to the company because of its speed and credit appraisal method, which analyzes thousands of variables to arrive at an “OnDeck score” that is used to decide the loan terms.

OnDeck has performed well in the loan origination area and has also been successful in charging high rates for the money it lends. Time will tell if it can do equally well in controlling its loan losses and becoming profitable.

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Tightening Ahead by the Fed–What Past Says About Future

By Charles H. Green

According to economist Kevin Kliesen, there’s a high likelihood that the Federal Reserve will begin its interest rate normalization process sometime in 2015, but to be certain, that decision will ultimately depend on the data and resulting economic forecasts. As a means of trying to understand what to expect, he suggested reviewing previous tightening cycles employed by the Fed may reveal evidence about what effects lie ahead.

Kliesen is Business Economist and Research Officer at the Federal Reserve Bank of St. Treasury Yield Curve After NormalizationLouis, and spoke before an audience gathered for the second quarter economic forecast presented by the Robinson College of Business at Georgia State University recently.

It’s widely known that the Fed removed the word ‘patience’ in it’s March statement concluding the FOMC meeting, which had been used at end of QE3 program as an expression of the pace they expected to proceed. However in March, Fed Chair Janet Yellen remarked that conditions “may warrant an increase in the fed funds rate target sometime this year.”

Historically the Fed’s decision to raise rates has always been more difficult than lowering rates and is always debated intensively. Former Fed Chair Arthur Burns described it as the anguish of the central banking, how raising rates evoked violent criticism. Yet more often, the Feds are accused of favoring the financial markets at the expense of the public and savers.

The Fed’s debate usually plays out through speeches offering various viewpoints of the twelve district presidents, all of which are monitored intensely. In their April survey, the majority (74%) of Blue Chip forecasters expected a rate increase in September, a major revision from the January survey when 65% believed that rates would rise in June.

Why all the uncertainty? It seems as though the data is not cooperating. As more data is collected, any decision to raise the Fed funds rate seems to be pushed farther out, indicating that both the Fed’s and private forecasts have been too optimistic. Inflation has continued to be much weaker than expected. But recall Chair Yellen’s remark earlier this year: “Don’t wait for the 2% inflation target.”

History suggests that monetary policy makers have stayed ‘too easy’ too long in the past. With as many economic factors affected by monetary policy–such as spending on interest-sensitive goods, bank lending, corporate balance sheets, household net worth and asset prices,–it’s easy to understand how the macro economy can be heating up faster than traditional economic factors can track.

In previous cycles, rate tightening always exceeded the market’s expectations, particularly during 2004-2006 (+4.25%), which carries its own risks and exposure. Normally, credit risk spreads and stock prices fall early in the cycle, with risk spreads rising later. But it takes about a year for industrial production and consumer spending to fall off. And in three of the four last cycles, it took about a year for the Treasury rate yield curve to to invert.

Net effect: the year following liftoff of the normalization, the economy generally improves, followed by slower growth later.

And it’s worth noting that Kliesen related that “history suggests that long expansions with low inflation tend to have smaller increases in the Fed’s policy rate, so keeping inflation low and stable is key. But history also suggests that each tightening cycle depends significantly on underlying economic conditions, and oil shocks have been important in the past.”

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Economy Will Grow in 2nd Quarter: Dhawan

By Charles H. Green

Real GDP grew at a paltry 0.2% for the first quarter of 2015, but economist Rajeev Dhawan doesn’t think the factors that drove this stagnation are here to stay. “After I read the GDP report, the word WOW escaped my lips,” Dhawan said. “WOW here stands for weather, oil and the world economy. The report showed clear damage from these three factors.”

Dhawan heads the Economic Forecasting Center at Georgia State University in Atlanta, Rajeev Dhawanand spoke before an audience gathered for the second quarter economic forecast presented by the Robinson College of Business on Wednesday.

It was unusually cold Northwest weather that drove nondurable goods consumption growth down to negative 0.3% (especially grocery purchases) in the first quarter, but on the flip side, spending on utilities (heating) rose. Conversely, overall gasoline savings were socked away into savings accounts, denying the previously forecasted upswing in consumer spending.

Dhawan predicted that the weather factor is temporary, except for the drought being experienced in the West, but in any case, the low oil prices will start to creep upward again as U.S. fracking production declines. “We’ve almost reached the bottom, with oil rig counts having dropped sharply with only a little bit to go,” said Dhawan. “But prices will not reach the heights of $120 a barrel anytime soon. I expect oil to start creeping up to $70/barrel by year’s end and stay in that range for the coming year.”

Dhawan Expects Economy to Bounce Back in Second Quarter

The world economy is facing problems on two fronts: First, China’s economy has failed to recover after a planned slowdown to curb inflation, affecting many emerging economies because of their supply chain connections. Second, the Eurozone is strangely experiencing negative government bond yields, due to the repeated threats of Greece’s exit from the Eurozone, during the trillion dollar bond-buying program (quantitative easing) of the European Central Bank.

Overall, these issues played out with a 7.2% decline in early 2015 exports. “The three WOW components shaved off close to 2.5% of U.S. growth in the first quarter,” Dhawan said. But, he asserted that these negative effects can be offset as the country rebounds in the second quarter.

“Weather is a temporary factor. As the seasons progress, it will soon reverse course and add to nondurable consumption. Most of the numerical damage to the GDP is now behind us,” said Dhawan.

Another side effect of the stagnant first quarter GDP results is the delay in a potential Federal Reserve interest rate hike.  “Oil, the global economy and investment should have stabilized by the end of October,” Dhawan reported. “This means that December is the earliest the Fed can raise rates.”

Highlights from the Economic Forecasting Center’s National Report

  • Following a gain of 2.4% in 2014, real GDP grew at a stagnant 0.2% in the first quarter of 2015. Growth of 3.3% is expected for the second quarter, bringing the overall rate to 2.5% for 2015. It will expand at a better rate of 2.8% in 2016 and grow 2.7% in 2017.
  • Business investment will grow a weak 3.2% in 2015, recover to 5.8% in 2016 and 6.4% in 2017. Expect jobs to grow by a monthly rate of 254,000 in 2015, 240,000 in 2016 and 232,000 in 2016.
  • Housing starts will average 1.107 million units in 2015, rise to 1.194 in 2016 and 1.253 in 2017. Expect auto sales of 16.8 million units in 2015, 16.9 in 2016 and 17.1 in 2017.
  • The 10-year bond rate will average 2.1% in 2015, and should rise to 3.3% before the end of 2017.

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It’s All About Incentives, the Rest is Just Commentary

By Amaresh Gautam

That people respond to incentives is one of the most fundamental economic principles. A correct incentive system for employees can be the difference between a successful and a failed business enterprise. An incorrect incentive plan for the C-Suite, can lead to fraud by the management of a large corporation. And tDollar

Incentives in a financial system as complicated as that of United States can get distorted at multiple levels. The incentive of a lending manager can be to motivate them to distribute as many loans as they can within their territory, and they may not be getting penalized for making bad loans. But one potential result will be that they won’t be bothered about credit quality, and will become too aggressive in meeting the target numbers.

Likewise, the CFO of a large financial organization may know that the risk of going bankrupt is minimal, since the institution will be presumably be rescued by the federal government, but the reward of making a successful risky bet has no limits. Thus they may be incentivized to take excessive risks.

According to remarks in a recent speech by Janet Yellen, Chair of Federal Reserve Board of Governors, a combination of responses to distorted incentives throughout the financial system created an environment conducive to a crisis.

It’s not possible for a single small business lender (or borrower) to do anything about perverse financial incentives corroding the system, even if they become aware of them. Correcting them lies within the job of the financial regulators. However, it’s still within the realm of self-preservation that one should maintain some degree of rationality when encountering perverse incentives.

Meaning? If another financial instituion reaches out to hire you, and offers compensation with incentives that sound unrealistically too good to be true, do a sanity check in your head before responding. Are you really worth that much more than what you are currently compensated, or are there some perverse incentives at play?

Remember the old adage: if it sounds too good to be true, it usually is.

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New Alliances Make Small Business Loans Easier

By Ravinder Kapur

A slew of partnerships and joint offerings creating associations between small business lending companies and other organizations that provide financial and related services to qualified borrowers, is opening up new avenues for private enterprises seeking loans. While non-traditional financing sources have been growing for some time, these recently announced alliances seek to leverage the relationships that companies have forged with small businesses over the years, with the innovative financing platforms and their investor base. 

Guidant Financial, a small business financing facilitator, and InvestNextDoor, which Financing Affiliationsconnects investors with borrowers, have announced a strategic partnership to extend a minimum of $100 million in loans to business owners.

This partnership will allow Guidant to provide capital to our existing lead flow of small businesses, which either are not a match for traditional financing sources, or would likely entertain more expensive financing that could compromise their long term success,” said Jeremy Ames, President and co-founder of Guidant Financial.

Sage Payment Solutions, a full-service payments provider to private enterprises, has partnered with Kabbage, an online lender, to offer its customers financing by using the latter’s technology platform. Sage has a large base of small and mid-sized businesses to whom they provide software and other services. This tie-up will now allow them to offer finance using the Kabbage technology platform.

Sage is focused on providing small businesses with the software, services and resources they need to grow and thrive,” said Paul Bridgewater, CEO of Sage Payment Solutions. “This partnership with Kabbage allows Sage to provide small businesses with much-needed financing.”

Newtek, a business lender, has created an affiliation with Lending Club, a peer-to-peer lender, to offer revolving lines of credit, small balance working capital loans and collateralized term debt facilities of up to $10 million.

Commenting on the tie-up, Lending Club’s founder and CEO Renaud Laplanche said, “We share Newtek’s commitment to helping U.S. small businesses understand the options and access the credit they need to thrive and grow. We’re thrilled that we can offer access to responsible options that are perfectly suited for our marketplace offering, and excited to work with Newtek to make credit more available to small businesses.”

As recently report here, FranConnect, a franchise software provider and business lending marketplace BoeFly, have partnered to offer a facility to prospective franchisees so that they can understand how much of funding they are likely to have access to. BoeFly cites about 5,000 lenders who use its platform to find borrowers, most of whom are from the franchise industry. This online tool, “bQualTM” can be accessed by FranConnect’s users to assess their borrowing potential.


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Intuit Invests in $100M Fund for Small Business Lending

By Ravinder Kapur

The ‘QuickBooks Financing’ platform will now have access to the proceeds of a new fund totaling $100 million, in which Intuit is one the investors, aimed at lending to small business loan applicants that allow lenders to access their QuickBooks online accounting data. This platform enables financial partners, vetted by Intuit, to lend to small business borrowers quickly and seamlessly.

The financing platform, which gives small businesses the option of taking loans from QuickBooks Financingseveral lenders who approve the applicant’s credit by analyzing real-time data, has already provided over $150 million in loans to QuickBooks customers, reports MarketWatch. This facility has the unique advantage of simultaneously allowing multiple lenders to analyse a potential borrower’s current data while also giving the small business borrower the option of choosing the lowest finance cost.

Dan Wernikoff, senior vice president and general manager of Intuit’s Small Business Group says that, “This fund solves the short-term credit crunch by giving small business faster access to lower-rate loans. QuickBooks Financing makes it easy for small businesses to access tailor-made solutions without having to complete paperwork or negotiate with lenders.”

Small businesses often have an urgent need for funds to enable them to benefit from a business opportunity that requires an immediate response. In such circumstances approaching a traditional lender may not work because of the time and effort required for completing the required forms and compiling data to support the application. Additionally, the processing time by the lender, even if the decision is positive, may be such that the business opportunity for which the funds were required has already slipped by.

To overcome the rigidity of traditional lenders many small businesses resort to using their personal credit cards for borrowing money to purchase inventory or pay wages. The QuickBooks Financing platform, with its access to borrowers real-time accounting data and online lenders, provides an ideal solution to this problem and facilitates the functioning and growth of small businesses.

Data compiled by Intuit indicates that 60% of QuickBooks customers have their loan requests refused by lenders as applications do not meet the financier’s credit approval criteria. On the other hand targeted campaigns on the QuickBooks Financing platform have resulted in an acceptance rate of 70%. This could be attributed to lenders having access to the current data of potential borrowers in a pre-determined format compiled automatically.

While the QuickBooks Financing platform has met with some success the moot point is whether many borrowers are ready to part with their online accounting data for the purpose of raising funds. However, the continued interest of investors in the program indicates that it has found acceptance with a large number of QuickBooks customers.

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Hot Air: Politicians Eschew SMEs for Big Business

By Charles H. Green

The Advocates for Independent Business, a consortium of fifteen trade associations that represent small business industries ranging from booksellers to florists, offered a sobering picture of the pandering nature of politicians, who hail small businesses as the bedrock of America, but throw billions of dollars to subsidize big business. Representing the advocates, Stacy Mitchell and Fred Clements penned a recent Op-Ed for the Wall Street Journal to make their case.

Said Mitchell and Clements, “A report by the research organization ‘Good Jobs First,’ Hot Airfound that two-thirds of the $68 billion in business grants and special tax credits awarded by the federal government over the past 15 years went to big corporations. State and local economic development incentives are similarly skewed. While the members our business associations—mostly independent retailers—must finance their own growth, one of their biggest competitors, Amazon, has received $330 million in tax breaks and other subsidies to fund its new warehouses.”

They continued, “Multinational companies also benefit from a host of tax loopholes. A local pharmacy or bike shop cannot stash profits in a Bermuda shell company or undertake a foreign “inversion.” The result is that small businesses pay an effective federal tax rate that is several points higher on average than that paid by big companies, according to a Small Business Administration study from 2009.”

To skew the lines of this argument further, it’s illuminating to recognize that many politicians demonstrate selective inconsistency in how they apply their own political ideology. In the face of smaller industries–such as independent businesses–who have little to offer other than simple votes, most politicians offer nothing in return.

While many wax on platitudes and rhetoric about the importance of apple pie and small business, after the election, many begin stammering about the “moral hazards” presented by government programs that incentivize small business resources, such as the U.S. Small Business Administration or U.S. Export-Import Bank.

But that’s in sharp contrast with how they view industries that can financially support their election campaigns. Ironically, it’s some of these same politicians who support government subsidies for agri-business giants like Monsanto and Archer Daniels Midland; who fight the imposition of sales tax collection on internet sales; who won’t address a broken corporate tax code that allows billions of U.S.-manufactured good sales to have profits rerouted to Ireland or another tax haven, to circumvent native tax coffers.

It’s the very definition of “crony capitalism.” And that is the real moral hazard we contend with.


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SBA Offers LINC to All Participating Lenders

By Charles H. Green

Last February, the SBA announced a pilot program to help small business owners locate a participating small business lender who offered SBA-guaranteed loan products called the ‘Leveraging Information and Networks to Access Capital’ program, or “LINC”. Initially the program was only accessible by the non-profit SBA lenders during its beta testing. During the recent “Small Business Week,” SBA Administrator Maria Contreras-Sweet announced that the pilot period was ending and that the program is now available to all participating SBA lenders.

“Effective today, all SBA lenders can participate in LINC, a platform that is bringing Business Loansentrepreneurs and SBA lenders together to increase access to capital. There’s a hunger among entrepreneurs to find financing to get their business off the ground or take the next big step in their expansion plan. The SBA stands there ready to help them, now with a few simple clicks,” said Contreras-Sweet.

The LINC matchmaking tool is now available to all 7(a) lenders nationwide, which constitutes a huge step toward giving small business entrepreneurs access to essential sources of capital in all 50 states and the U.S. territories.

“Since we launched this program in February, close to 14,000 matches have been made with LINC. If you have a bankable business idea backed by good credit and sound financial planning, the SBA is streamlining the process for you to get the capital you need,” said Contreras-Sweet.

The LINC portal is a proactive strategy in the marketplace to promote the SBA’s financing products to additional small business owners. In particular, it’s likely to benefit smaller, younger business owners who have not established banking or lending relationships to approach, and can save time and effort by narrowing their search for capital to SBA participating lenders.

For lenders, it offers one more lead generating source to connect with an ever fragmented, competitive small business environment. In particular, for those lenders  who have embraced smaller lending for SBA loans under $350,000, this tool is likely to increase their volume of inquiries.

Lenders may sign up for LINC electronically or email with questions.


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