Persistence can pay off. Funding Circle started working with the Small Business Administration (SBA) in 2019 to be included in their hallmark 7(a) lending program.
Today, we learned that the SBA has approved three new licenses for this program: an Arkansas CDFI, an Alaska CDFI, and Funding Circle.
This is a big win for Funding Circle as the only fintech of the three new approvals. This is the result of new rules that the SBA undertook that allowed fintech lenders to apply.
I caught up with Ryan Metcalf, the Head of U.S. Public Affairs for Funding Circle and the person spearheading this effort for the last four years. He was visibly excited about this news.
“Today is a great day not just for Funding Circle but for American small businesses,” said Metcalf. “An SBA 7(a) license will allow us to extend more offers to more small businesses on better terms than we could do otherwise.”
The reality today is that most banks do not participate in the SBA 7(a) program. In fact, 83% of community banks have failed to make a single 7(a) loan. You need a special skillset to underwrite these kinds of loans and most banks do not possess this, leaving their own small business customers to look elsewhere for funding.
The SBA made some changes to the 7(a) program that makes it more attractive for Funding Circle. They created a “Do what you do” concept for SOP 50 10 7, the new Standard Operating Procedure for 7(a) and 504 loan programs. What this means is that lenders can bring their own underwriting standards and user experience to the 7(a) program and they streamlined many of the requirements, making it much more attractive to fintech lenders such as Funding Circle.
Why the 7(a) program is so attractive
The 7(a) program exists to encourage banks and approved non-banks to do more lending to small business. The main way they do that is the government will guarantee up to 85% of the loan amount. So, if a small business takes out an SBA 7(a) loan and then defaults right away the lender is only on the hook for 15% of the loan amount.
Taking on less risk means that lenders like Funding Circle can expand their credit box to more small businesses, those that would have been rejected under their standard underwriting model.
Small business owners love 7(a) loans because they are usually the cheapest form of capital available. One of the knocks on the program is how onerous and time-consuming the application is. But with Funding Circle able to bring their standard user experience and underwriting process to the 7(a) program that negative will be reduced substantially.
Funding Circle is perfectly suited to take advantage of this program because they already offer a similar product, a fixed rate term loan for up to 7 years. In fact, for those paying close attention you will notice that Funding Circle already offers 7(a) loans but they work with partner banks to fund these loans.
When I asked why bother with a license if they are already doing 7(a) loans Metcalf said there are three reasons:
- They can say yes to more small businesses when doing it themselves.
- They can offer larger loans with a longer loan term.
- Better margins for Funding Circle.
While Funding Circle has been approved for a new 7(a) license they cannot start making new loans immediately. There are certain policies and procedures that need to be in place and they must show proof of the minimum capital requirements. But Funding Circle has already been planning for all these things so they will respond quickly and hope to make their first loans early in 2024.
Embedded lending for 7(a) loans
This became even more interesting to me when Metcalf talked about embedded lending. Funding Circle launched their lending-as-a-service program in 2022 with Pitney Bowes and DreamSpring, a CDFI based in New Mexico.
Now, they are looking to embed the 7(a) program within a bank’s product offerings. Being a licensed 7(a) lender will allow them to develop the trust needed to engage with banks on a large scale.
“Most banks and credit unions can’t afford to offer 7(a) loans at scale. By embedding Funding Circle’s loan program into their product offerings, they will not have to turn their small business customers away,” said Metcalf.
We ended the conversation with Metcalf incredibly bullish on being a part of the 7(a) program. “Eventually Funding Circle can be the number one SBA lender in the sub-$500,000 loan space.”
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