While small business sentiment reached a 3.5-year high in November, a January report from the National Federation of Independent Business (NFIB) indicated that uncertainty is rising.
There are several reasons for this. Entrepreneurs are closely watching how potential tariffs and inflation play out as they consider what they can afford to do this year and how they will finance it.
For many years, SBA 7(a) loans have stood out as attractive options offering low rates and extended repayment terms, a trend that continues particularly as interest rates rise. Last year, the SBA approved over 70,000 7(a) loans, totaling $31.1 billion in funding, a notable increase from the 57,362 loans approved in 2023.
While extraordinary methods of support, these loans are not intended to keep a business afloat or cover payroll. Instead, they act as a launchpad for growth, enabling companies to invest in personnel, equipment, and resources they need specifically for scaling. For instance, if a business recently secured a large contract, an SBA loan can provide the capital needed to hire a team or increase inventory to meet that demand.
Banks are eager to provide these loans due to their potential profitability, but the extensive documentation required creates challenges in effectively underwriting loans below $500,000.
Tapping financial spreading could change that.
Limitations and Misconceptions Abound
Financial spreading involves analyzing a borrower’s financial statements to predict trends and identify potential issues. Nearly all banks utilize this practice to some extent. From financial statements to regulatory reports and intake forms, financial spreading aids in risk analysis, credit decisions, appraisals, and more. According to a 2023 report from Infosys, a large commercial bank may need to process around 100,000 financial statements each year for their spreads.
Leveraging automated financial spreading for SBA loans could be transformative, alleviating burdens for both lenders and small businesses.
While popular, a common misconception is that these loans are easy to qualify for, but that is far from accurate. Currently, SBA loan applications require between 15 and 30 documents – in addition to tax documents – making the process historically complex. SBA lenders have their own specific requirements, often preferring businesses that have been operational for over two years, maintain a minimum FICO score of 650, and meet varying monthly revenue criteria.
Borrowers often find themselves confused or misled about their eligibility and are frequently surprised by the extensive list of required documents.
Putting Small Businesses Back in the Driver Seat
As banking has modernized the consumer banking experience over the past few decades, such as depositing checks and withdrawing cash, it is also poised to enhance efficiency in small business lending now.
Technology is emerging for small businesses to easily upload bank statements or connect their bank accounts via third-party services to retrieve the information needed for SBA loan applications automatically. Owners can upload two years of business and personal tax returns, a debt schedule, a year-to-date profit and loss statement, a balance sheet, and other necessary documents to expedite the process, facilitate the financial analysis and expedite the decision-making process.
Subsequently, the latest technology will use OCR (Optical Character Recognition) to instantly review the tax statements, identify key fields, then calculate the most important ratios to determine the true health of the business. One of the most important ratios is the DSCR (Debt Service Coverage Ratio). For most SBA loans, a minimum DSCR of 1.25 is generally required, meaning a business’s profits / cash flow must equal at least 1.25 times its annual loan payments.
Small businesses and banking executives alike need to know this technology exists and ask for it.
Forging Ahead
It can be challenging for small businesses to plan for the year ahead amid economic uncertainty. However, it’s important to consider SBA loans as an option.
With its variable rates, payment amounts adjust when the Federal Reserve changes the prime rate. Compared to short-term or revenue-based financing, which are often less flexible and have more aggressive repayment schedules, SBA loans remain one of the most affordable forms of capital available today.
We cannot forget that small business owners are consumers too, and consumers have a choice. Prioritizing their banking relationship and making sure they can use the tools to speed up the application process can make all the difference in maintaining their business and growing alongside them.
