Main Street USA is comprised of small businesses that power local economies. These businesses provide jobs within their communities as well as the goods and services people need to thrive. But having enough capital to launch or grow a business is elusive for many startups and entrepreneurs in areas with a large population of low-income borrowers and minorities.
Because there are fewer physical banks in these communities it is harder for underserved businesses to get the funding they need (SBA or otherwise) from traditional sources.
While online lending addresses this issue, many underserved business owners still find it challenging to get approved for small business loans. Unfortunately, a lack of accessible funding can stunt business growth and negatively impact the economic and financial resilience of the communities these businesses serve.
The United States government, through the U.S. Small Business Administration (SBA), developed loan programs to increase financing opportunities for small business owners.
Your community bank can help fill the small business lending gap so that businesses get the capital they need. By administering SBA loans and forming partnerships with Community Development Financial Institutions (CDFIs), your financial institution can directly contribute to the financial success of businesses in underserved communities.
At the same time, your bank can strengthen its own position by fortifying its loan portfolio without increasing its risk. This is made possible by the SBA.gov loan guarantee.
This article explores how SBA loans can close the small business funding gap while strengthening community development.
The Small Business Funding Gap Dilemma: Why Access Still Lags For So Many
Access to capital is one of the top challenges for small business owners. A survey by Goldman Sachs showed that 81% of small business owners lack affordable access to capital.
While established businesses have an easier time securing financing, startups and entrepreneurs from marginalized groups, including minorities, Native Americans, and women, experience much higher rejection rates. They’re also typically approved for lower loan amounts when they do get funding.
Even though the number of minority-owned businesses has increased in recent years, they only represent 20% of employer businesses. Still, they’re responsible for hiring almost 10 million workers and accounted for $357.4 billion of the U.S. payroll in 2020.
Standard lending models usually favor applicants with a well-defined credit history and those who meet minimum collateral requirements. Many new or minority owned businesses don’t have adequate business credit or extra cash to invest in their businesses.
As a result, many entrepreneurs with excellent business ideas but minimal financial histories and documentation find it difficult to receive funding and grow the business they envision.
This gap goes beyond hurting individual businesses; it impacts entire communities. When small businesses can’t access capital, there are fewer employment opportunities for communities and less disposable income, which could then be put back into communities to help them thrive.
Closing the funding gap is essential, and community banks can play a powerful role in changing the status quo.
SBA Lending to Expand Access to Capital
SBA loan programs are an indispensable tool for increasing access to capital for underserved entrepreneurs. SBA lending reduces a lender’s risk and provides borrowers who don’t qualify for traditional financing with a way to get financed at more competitive terms and interest rates.
What’s more, approved SBA lenders can serve these small business owners without sacrificing sound lending practices.
SBA lending has several advantages for underserved borrowers. One is that SBA loans require less of a down payment and have longer repayment terms. This can be helpful for entrepreneurs with limited cash reserves.
SBA programs also have flexible underwriting guidelines. Rather than focusing primarily on credit scores and collateral, they allow lenders to consider alternative criteria about a borrower.
This approach is beneficial for startups, minority-owned businesses, and entrepreneurs with alternative income sources, allowing them to qualify for financing that would otherwise be out of reach.
SBA loans also enhance risk mitigation for financial institutions wanting to provide capital to riskier borrowers. Unlike conventional loans, SBA-backed lending allows banks to approve more loans to applicants with less-than-ideal credit profiles, insufficient collateral, or a limited business history. The result is greater financial inclusion and the hope for healthier, more resilient local economies.
Success Story: Biz2X Helps BayFirst Expand SBA Lending and Accelerate Growth
Tampa Bay small business lender BayFirst Financial reached out to Biz2X to support its growing SBA lending division. BayFirst launched with Biz2X in March 2022, and by 2023, BayFirst had over 3,500 decisioned applications, with loan volumes increasing throughout 2023. This resulted in BayFirst becoming one of the top five SBA lenders in the country.
BayFirst’s operational efficiency saw tremendous improvement, with its timeline from application to decisioning happening in just 16 days, well below traditional workflows.
Through its collaboration with Biz2X, BayFirst improved the customer experience with automation, document management capabilities, and a broker portal, accelerating the financial institution’s growth well beyond what it thought was possible.
Working With CDFIs to Expand Reach Even More
CDFIs were designed to help borrowers outside the traditional lending market. They consist of non-profit and for-profit institutions that provide financial services, products, and education to underserved communities. They are vital for bridging lending gaps in underrepresented areas and are a lifeline for small businesses.
CDFIs typically have long-term relationships with local leaders and small business owners. They gain valuable insight into the needs of their target markets and either directly facilitate loans or assist borrowers in overcoming the common barriers to financing.
Banks can partner with a CDFI to better serve businesses that fall outside typical credit profiles. Collaborations between community banks and CDFIs also enhance connections in communities where trust in traditional financial institutions may be low.
Many banks find that such partnerships help diversify their loan portfolios and position them as proactive, responsive institutions that are genuinely committed to inclusive economic growth.
Through meaningful partnerships with CDFIs, community banks can enhance access to capital, build trust, foster entrepreneurship, and support long-term stability in the communities they serve.
Recommendations for Small and Regional Banks
Community banks wanting to expand their presence in underserved markets require a thoughtful approach. Offering SBA loans and working with CDFIs are both essential. But your bank also must develop a comprehensive strategy that brings together technology, community, and internal processes to achieve sustained success.
1. Form essential community partnerships.
Partner with local business groups, chambers of commerce, and not-for-profit advisors who have close working relationships with small businesses. These partners can provide referrals to your business and provide you with information on the specific needs of your target customers.
2. Prioritize financial education as part of the lending experience.
Financial education should be an instrumental component in the customer journey. Your financial institution can host webinars and workshops and mentor borrowers. Many entrepreneurs in underserved communities lack a solid understanding of loan basics, such as eligibility guidelines, credit development, and financial documentation.
Your community bank can guide them on writing a business plan, preparing for the loan application process, and managing cash flow. This can increase business sense among borrowers and lead to positive repayment outcomes. At the same time, it can help your bank form more meaningful connections in its business relationships.
3. Leverage data to identify gaps and opportunities.
Data can help your bank identify and track who is being reached, who isn’t, and why. Look at approval rates based on demographics, geography, and stage of business. Once you identify underserved segments, your bank can refine its outreach initiatives, adjust its lending strategies, and tailor products that better serve business needs.
4. Partner with an SBA digital lending platform.
A partnership with a platform like Biz2X can make a dramatic impact on your small business lending arm. Modern business owners are often more comfortable completing their loan applications online versus in person.
Your bank can also serve more borrowers faster by automating and digitizing the SBA loan process. And it can do so at a greater level of efficiency and accuracy.
Technology can streamline the onboarding process, simplify underwriting workflows, automate document collection, and ensure compliance for SBA loans. It can also reduce the loan decisioning time without increasing risk to your bank, allowing it to increase its lending capacity without overwhelming your staff.
Final Thoughts
Expanding access to capital can help build better, more equitable communities. By leveraging SBA loans, collaborating with CDFIs, and providing financial literacy education to entrepreneurs, your bank can drive real economic development where it’s most needed.
These actions contribute to the success of entrepreneurs and create jobs that revitalize neighborhoods, providing community resilience over the long term.
To take the lead, your community bank should merge mission-based lending with modern technology and collaboration. The right technology, such as the Biz2X platform, can assist your bank in scaling responsibly and safely, allowing it to serve more small businesses.
With the right approach toward serving Main Street, your financial institution can help improve the accessibility gap for capital and help create a level playing field for businesses, regardless of socio-economic background or geography, allowing them to grow, compete, and thrive in the marketplace.
FAQs About SBA Loans and Expanding Capital Access
1. What are the benefits for community banks offering SBA loans?
SBA-approved lenders can grow their customer base by issuing small business loans to business owners who often don’t meet traditional lending guidelines. The SBA guarantees a portion of the loan and minimizes risks for banks, so a bank can lend more confidently to underserved markets.
2. How do SBA guarantees reduce risks for banks?
Depending on the SBA loan program and how much is borrowed, the federal government guarantees up to 85% of the loan amount. This means that if a borrower defaults on a loan, a lender can recover the guaranteed portion from the SBA.
3. What types of businesses benefit the most from SBA loans?
SBA loans were designed for startups, minority-owned, veteran-led, rural, and economically depressed businesses. These businesses have more challenges when it comes to traditional finance and benefit from lower down payments, longer repayment terms, and less strict underwriting guidelines compared to traditional financing.
4. What can an SBA loan be used for?
The SBA offers loan programs like 7(a) and 504 small business loans, as well as microloans. These programs serve a variety of business needs, including real estate purchases, working capital, lines of credit, and even disaster loans to assist in disaster recovery for homeowners and businesses.
5. How does technology support SBA lending?
Fintech solutions such as Biz2X help automate the entire SBA loan lifecycle from application intake to decisioning and compliance. Technology can also provide your bank with a fast and efficient way to serve more borrowers and increase lending without placing additional burdens on underwriting staff.
Your community bank can be a catalyst for inclusive economic growth by expanding access to capital to underserved businesses. Discover how the Biz2X platform can help you serve more small business owners while streamlining your lending process, reducing risk. Contact us today for a demo of our SBA loan software.
