Policy and California's Economy (PACE) Briefing Series: Removing Barriers to Small Business Lending
DescriptionFollowing up on the Policy and California’s Economy (PACE) roundtable’s July session, the Milken Institute’s California Center, in collaboration with the Small Business Administration (SBA) and the Federal Reserve Bank of San Francisco, convened a second meeting to explore ways to make it easier for small businesses to obtain loans. Recommendations emerging from the meeting include a call for banks and the SBA to streamline lending procedures.
Experts attending the roundtable included bankers and SBA lending officers as well as local development and government regulatory representatives. SBA Regional Director Victor Parker joined California Center Director Kevin Klowden in facilitating the session. Representatives of the SBA outlined efforts to improve lending, especially in underserved communities. There was a particular focus on loans of less than $150,000. Continuing into 2015, the SBA will continue to promote its Community Advantage programs to encourage banks to eliminate associated fees that make borrowing more difficult.
Participants highlighted the lack of incentives for banks to share information and discussed the absence of a uniform standard among banks for lending and related services. The participants concluded that such practices, and the lack of resources, restrict local lending. The effects are especially acute with respect to small-ticket and microlending practices. One recommendation called for specific revisions to SBA procedures to increase data sharing while providing a platform for technical assistance among investors, borrowers and lenders. From an institutional perspective the roundtable emphasized the importance of resolving the risk barriers associated with profitability for smaller loans and the need to address the associated economies-of-scale issues with community based lending.
In order to bridge the divide between institutional and community interests, resolve the barrier between businesses and lenders and to address the risk assessment hurdle, the group suggested two potential solutions:
1. The SBA should revise its guidelines to allow for lenders to charge higher interest rates on smaller loans in order to cover higher levels of associated risk and due diligence.
2. Establish a new small business consortium, composed of groups of smaller banks and community-based management, which could serve as a loan fund repository and revolving loan pool. At the same time, the participating institutions should create a platform for data sharing and management, efficiency and due diligence among a locally coordinated group of SBA lenders.
In the near term, the California Center will review these recommendations and strategies with stakeholders, industry and policy leaders while continuing to develop the necessary policy reforms to address the limitations to small business and economic growth.