Running a small business can be hard, with all the loans and other complicated things you have to take care of, but these things are important to research and understand. Financial institutions use a number of economic modeling tools to assist in their business practices. One such model is the Current Expected Credit Loss or CECL standard that replaced the ALLL standard in 2016. This model is used to predict probable credit losses that result from default events over the life of the financial product. There are other standards and policies used by lending institutions which can affect acquiring a loan.
If you want to be a successful small business owners, you’ll want to be fully cognizant of all newly implemented and upcoming regulatory changes for small business loans. Here are some factors you’ll want to take a look at that could affect credit loss for your loan.
Policy changes for small business loans can be changes specific to a particular financial institution, or they can be changes initiated by a government entity. Financial institutions that offer traditional loans have to follow government regulatory policies when offering and administering traditional small business loans. The Small Business Administration makes policy for government-backed business loans, and they have recently proposed several changes that will affect small business loans. These changes and others could be beneficial or not for your current loans, and you may want to consider paying off or refinancing your loan in order to acquire a new loan with better terms.
Qualitative & Environmental
Besides real financial numbers, qualitative and environmental factors like employment history, length of time for money accounts, length of time in a residence and even social media activity are also examined. It's helpful to understand the purpose of qualitative and environmental factors in CECL. Qualitative factors are used to give a picture of the borrower's financial life. The new CECL policy will be used to consider the "life of the loan" when estimating an expected loss. Qualitative factors will be expanded and will include the borrower's financial condition, business prospects and the nature of the assets. Geographical and grouped statistical data can also be taken into account, and the areas the business is operating may affect acquiring a small business loan.
Loan Criteria Changes
Certain regulatory changes that are either recently implemented or are being proposed can change how a financial institution calculates credit loss. One such change is a proposal to have a standard set of requirements for underwriting, loan processing, servicing, closing, litigation, and liquidation. In 2014, the SBA removed the "Personal Resource Test," which required the business owners to provide personal liquid assets in order to reduce SBA-guaranteed funds for the loan. In 2018, the SBA proposed a new personal resource test. Lenders want a good partnership with local businesses.
Granting loans to small businesses is one way that these financial institutions can help their communities and their own businesses as well. However, these lenders are required to follow specific laws and regulations as related to their lending policies. When you understand the factors that are involved in the lending process, then you will naturally be able to have a more profitable experience with your lending partner.
If you’re looking to get some help with running your own small business, take a look at our services and see how CAIS can help you!