We’d like to talk about loan securitization for a moment, but have a small caveat. Despite the 2008 meltdown, if you acknowledge it as a financial tool that can be used (or abused) in a variety of ways, we invite you to continue reading. If you have already doomed securitization as an unallowable practice, we respectfully disagree, but realize the rest of this post may be moot.
The argument for securitizing small business loans is once again gathering steam. Across the Atlantic we’re seeing calls to action because the potential to fuel small business growth simply can’t be ignored. The very defining characteristics of small business credit portfolios—large loan numbers, small loan dollar amounts, and diverse obligors—is what makes their securitization appealing. Assembling a diversified pool is easier. As is customizing a pool’s risk profile.
The reason small business loan securitization has not taken hold in a big way is because of the lack of standardization. The heterogeneous nature of the obligors along with the variations in bank underwriting criteria makes it nearly impossible to blend portfolios and characterize pools. It’s like trying to compare three different groups of students from MIT, Ohio State, and Bluth County Community College—they all may have B+ averages, but variations in the measurement scale means that all B+’s are not equal.
WAIN Street’s Business Credit Health Index is poised to become the standard that can enable market participants to compare, value, and communicate about the risks and opportunities contained in small business credit portfolios. The data is robust enough to allow aggregate comparisons and drill down by a variety of demographic information. Any pool of obligors can be easily analyzed to see how it compares and how its various segments stack up. This bypasses the roadblock of inconsistent underwriting standards.
WAIN Street sees securitization as a great opportunity for small businesses. As it stands now, they are losing out as banks focus on more profitable and easily securitized loans that go to larger companies and are easier to consolidate. WAIN Street will help unlock new capital that will fuel small businesses as they create new jobs and innovative new products driving the economy forward.