Now that it finally has a permanent chief in place, critics of the U.S. Small Business Administration have fired up their war drums.
The loudest banging came from Senator Jeff Sessions who called the agency’s lack of proper risk management a “moral hazard.”
The senator claims it allows banks to profit from loaning money to high-risk applicants, while “taxpayers shoulder the cost of the default.”
So is it true? Will the SBA insure loans to any borrower with a heartbeat and social security number?
Not exactly. Let’s look at one concrete way it manages default risk.
SBA turns to FICO SBSS credit score
Starting on January 1st of this year, the SBA implemented a new policy that requires all 7(a) loan applications up to $350,000 begin with a pre-screening for an acceptable FICO SBSS score.
Right now the minimum SBSS score is 140, but may be adjusted from time to time.
Without an acceptable score, you won’t even get past the SBA’s pre-screen process, let alone its full underwriting requirements.
What is the FICO SBSS score?
Like the consumer score you’re familiar with, FICO also has a model that creates a credit score for small business owners (FICO SBSS).
The score ranges from 0 to 300. And like your personal FICO score, the higher it is, the better.
FICO’s SBSS model arrives at a score based on a borrower’s personal credit data, business credit data and other financial factors.
By combining all of this data, it can offer a relatively unbiased and global view of a borrower’s financial health.
Small business deserves help
So while some of Senator Sessions’ concerns about SBA oversight and accountability may be warranted, it’s pre-screening process shows that the agency isn’t as reckless as he and other critics claim.
Aside from political theater and agenda-pushing, this fact remains: The SBA helps small business gain access to badly-needed capital.
And when you consider that small business employs 50% of the nation’s workforce, I’d say the SBA is worth every penny.
This article was originally written on April 17, 2014 and updated on November 3, 2016.