By providing partial guarantees of billions of dollars in loans to mid-market and small businesses, the SBA is navigating treacherous waters. While fulfilling their mission to support small business growth, there’s always a danger that the SBA safety net allows lenders to excessively gamble on riskier companies exposing themselves to unsafe losses. Recent “Liar Loans” that caused the SBA to revoke their guarantees are a perfect illustration of these potential landmines.
As treacherous as the task is, the SBA is vitally important to economic growth and job creation. Mid-market and small businesses can be especially vulnerable to capital short falls. Higher credit risk and a lack of information make banks and other lenders particularly apprehensive about handing out cash to these companies. By sharing risk with the SBA, banks can lend to companies they normally would not have the risk tolerance for.
To prevent reckless lending the SBA uses strict lending guidelines and shares historical data on defaults. Data is key because it empowers lenders to control their own destiny by making better decisions on whom to lend to. A recent SBA report shows that about 1.8 million of their loans worth about $130 million went bad. The interesting part is that they include a breakout by NAICS code so you can see how different industries fared against each other. Lenders can look for trends in this data and incorporate that information in their lending processes.
There’s an opportunity here though to provide even richer data. It’s really hard to draw industry correlations with data on just $130 million in loans when your total population is over $600 billion. A more comprehensive data set could improve insight. The SBA information takes time to aggregate and only represents businesses who already have SBA loans. A broad and timely data set could be used to complement the analysis of SBA default rates and provide even deeper insight.
The WAIN Street Business Credit Health Index (BCH Index) is a super charged version of this report that considers more than just SBA backed loans. The index is the result of the most comprehensive analysis of business data ever undertaken: over ten billion data points including information from almost every business in the US. Actual factual data about commercial behavior around defaults, credit availability, legal actions, and business growth provides a robust, coherent gauge of nationwide business credit health. The BCH Index is the most complete, timely, and detailed source of information available on US businesses. It does more than just count defaults; it evaluates overall credit health.
This level of information could enable more in depth analysis of the SBA’s loan pools and allow identifying strengths and issues. Wouldn’t the SBA like to know if the 877 defaults in the ‘bookstore’ industry is above or below the national average? If it’s above then they could figure out why and fix it; if it’s below they could identify what they are doing right and apply it elsewhere. Deeper data from a broader pool of companies enabling better analysis is what WAIN Street brings to the table for the SBA and lenders.