According to a new study, the expansion of large bank holding companies and the increased use of credit scoring for small business loans should make it easier to securitize small business loans for the secondary market. The study released by the Office of Advocacy of the Small Business Association (SBA), concluded that more money will become available for entrepreneurs.

Small business policymakers have seen the development of a secondary market for small business loans as a way of improving the flow of capital to entrepreneurs. In the secondary market loans are packaged together by banks and sold as securities to investors, providing fresh capital to banks for new loans. Similar, secondary markets have helped home mortgage lenders to sell loans quickly giving them new opportunities to, in effect, lend the same funds over and over. To stimulate growth in the secondary markets, Congress passed legislation in 1994 to remove the regulatory barriers of securitizing conventional small business loans.

Unfortunately, certain variables have hindered the emergence of a secondary market in the past decade. A surplus of market liquidity in the 1990?s reduced the need for extra liquidity from the public markets. More restricting was the lack of standardization of small business loan underwriting practices. Two factors have changed the secondary market outlook.

First, recent uses of credit scoring models in underwriting have become more common in the US banking sector, instead of the more traditional relationship underwriting of loans. This has been especially true with smaller dollar loans or lines of credit less than $100,000.

Second, bank consolidation has resulted in the emergence of multibillion-dollar bank holding companies in the US. As banks consolidate, they create larger pools of small business loans especially small business credit lines and this provides better secondary market opportunities. Because investment banks and rating agencies, ?underwrite the underwriters? rather than the loan pool alone, mergers have increased the likelihood of securitizing small business loans. In other words, larger pools of loans underwritten by fewer originators, means it is easier and cheaper to do due diligence on lenders. All of these factors have made the development of a secondary market for conventional small business loans more likely.

OUR TAKE
The authors of the report don?t hypothesize when this will translate to more money for small business owners. After all, they are only speaking of a potential secondary market, not one that is currently operating. But, it is certainly a positive step, which will ultimately help entrepreneurs by giving them more access to loans than they had before.