How to Fix the Small Business Lending Process

We recently applied for a small business loan through One Main Financial, which was approved in 24 hours, but the interest rate was up there with the credit cards, so we turned it down. As a result, One Main invited us to lead a focus group on the small business lending process, and what follows is what we said:

1. Decentralize the lending process to online or branch levels; we liked that. It should take no more than 24 hours for loans up to $50k. Beyond that, up to $250k, maybe a week.

2. Find out what the business wants to use the money for; we didn’t have a clear need, but does the project pencil out, e.g., return the cost of capital? Does the business have cash flow to repay the loan if the project doesn’t work out?

3. If you say you’re going to lend to small business, do it; our version of small business is 2-50 employees. 1 is a startup, which is a separate category.

4. Interest rates should be commensurate with risk; One Main wanted to lend at 23%, which IMHO, isn’t warranted. We were thinking 10%, since the prime is 4% or so, and if you mix in their cost of capital, which is probably 20%, you get a blended rate of 7% or so. We, at least think our loan would have zero risk of not being repaid.

5, The Wall Street Journal, for a change, was right on target when they decried the lack of small business lending by money center banks, but the cudgel has been taken up by smaller banks and credit unions, although lending is certainly not as high as business would like it to be.

6. The SBA continues to do good work in the larger loan categories, and the originating bank only has a 10% risk, so maybe that’s where they should stay. But be honest.

So, that’s it. Comments welcome.

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