Does Automation Eliminate Bias from Small-Business Lending?

According to American Banker, the problem: Though women own a third of U.S. small businesses, they get less than 20% of the loans made through the bank-centric, federally backed system that distributes a lot of credit to such firms.

Reasons: Perhaps a combination of biased loan decisions, fear of rejection by traditional lenders and the unique characterstics of women-owned businesses.

Emerging solution: Online lending, because it’s less intimidating than staring down a loan officer at the local branch, and it holds the promise of more objective credit analyses.

Indeed, the early evidence suggests that online applications and automated decisions are adding fairness to the process of granting small-business loans to female entrepreneurs.Online portal SmartBiz Loans analyzes Small Business Administration loan applications on its member banks’ behalf and sends them the loans that best match their underwriting policies. Members approve 95% of the loans SmartBiz sends them. Thirty percent of the loans made through SmartBiz go to women-owned businesses. That figure nearly matches their market share: women own 9.8 million small businesses, about a third of the U.S. total. The situation is similar at another small-business-loan portal called Fundera, which accepts loan applications on behalf of traditional SBA lenders and alternative lenders including Funding Circle, Bond Street, Kabbage and OnDeck Capital. One in four Fundera applicants are women, and 25% of loan recipients are women. Traditional bankers should take note, because only 18% of SBA 504 and 7(a) loans were made to women-owned businesses in fiscal year 2016, the agency said. Moreover, only 5.5% of women business owners obtain commercial loans of any kind from banks or other financial institutions to start or acquire their businesses, compared with 11.4% of male business owners, the SBA said.

So why are women business owners far more likely to obtain a loan by applying online to SmarBiz Loans– which is simply embedding banks’ underwriting policies in its platform –than by going into a branch and talking to a human? “It’s all online,” CEO Evan Singer said. “I can’t speak to somebody going into a branch and what a loan officer would say in the branch, because we don’t do that. These are people who are coming online and there’s no bias in the process.”

The top three SBA-lending banks declined requests for interviews. Wells Fargo, the largest lender, offered this statement: “We want to make every responsible loan we can for women business owners, and we base all loan decisions on the creditworthiness of the borrower. We are proud of the fact that since 1995 Wells Fargo has loaned more than $55 billion to women business owners.”

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American Banker – Does Automation Eliminate Bias from Small-Business Lending?