Former Small Business Administration chief Karen Mills has a vision for a small-business utopia.
“In my hometown in Maine, there is a woman who runs a brewpub,” Mills said. “She told me she sits on her bed at night, opens her laptop, pulls up her QuickBooks account, her bank account, her TurboTax account, and her Square payments account, and in her mind she tries to create a spreadsheet of her cash flows going forward and figure out if she needs to borrow money.”
In Mills’ vision, all the data that banks and fintechs take in to make their lending decisions — about cash flow, payables, receivables, payments and the like — would be presented to customers like this pub owner to help them run their businesses. They could see their cash flow out into the future, including the impacts of weather and seasons. Somewhere on that dashboard would be a button they could push to get a line of credit or get pre-approved for a loan.
“That would let more small businesses weather a previously life-threatening cash crunch,” Mills said. “I believe that could be a game-changer, maybe even reverse this troubling trend we see of fewer small businesses starting.”
Mills also said she hopes banks start perceiving small businesses “not as the poor cousins of the consumer credit operation, but as a unique and important and profitable line of business they can invest in, because small-business lending has different needs than the consumer lines. If you think about the small-business borrower first, you design an operation that is meant for them. They will have a better customer experience, and they will become loyal parts of the bank.”
All of which helps explain why Mills is scheduled on Thursday to announce that she has joined the Eastern Bank online lending spinoff Numerated Growth Technologies as an adviser and investor.
When Mills became SBA administrator 10 years ago, the country was in the Great Recession, credit markets had frozen, and small businesses were failing because their credit lines were being pulled. About 1.8 million small-business jobs were lost in the first quarter of 2009 alone.
“The president [Barack Obama] and Larry Summers [the National Economic Council director] let me do something pretty aggressive at the time, which was to raise the SBA guarantee rate to 90%, and we got 1,000 banks back to SBA lending in six months,” Mills recalled. “That began the unfreezing of the credit market.”
During her time at the SBA, Mills worked closely with many community banks.
“I came to respect their roles in their communities and locations and realize they were really under stress,” she said. “When I started, there were 8,000 community banks — now there are less than 5,000.”
When Mills left the SBA in 2013, she became a senior fellow at Harvard University and began writing white papers about how cyclical pressures and structural changes were putting the squeeze on community banks. She also saw the ascent of fintech firms and wondered whether the technology they were creating could relieve some of that pressure and make credit more available, especially in the form of small-dollar loans to small businesses.
"Having [Mills'] expertise around the table allows us to not go chasing after shiny, bouncy balls that are not the future of where digital lending is going.” — Numerated's O'Malley
“With a traditional relationship banker, it’s just too expensive to make a $50,000 loan or a $10,000 loan in the traditional way,” she said. “So the hope is that this technology will unlock much more potential for community banks to continue to serve the small-business community.”
In 2016 Mills attended a community banking conference where “all I kept hearing about was this guy who’d been working at Eastern Bank,” she said.
The "guy" was Dan O’Malley, who had started an innovation lab within the 200-year-old mutual bank and was building technology for online small-business lending that would work within the operations of a community bank.
Mills sought him out and began a conversation that led to her writing a case study for Harvard Business School on his innovations.
The CEO of Eastern Bank, Bob Rivers, later decided to spin off O'Malley's unit. Mills decided to invest in the new company, Numerated, and this week she became an adviser to it.
“We’re excited to have Karen on board as an adviser because we look to surround ourselves with people who understand how banking and lending are done,” O’Malley said. “Karen’s perspective has been helpful in continuing to shape what we are building at Numerated. Having expertise around the table allows us to not go chasing after shiny, bouncy balls that are not the future of where digital lending is going.”
Numerated now has 11 bank customers ranging in asset size from $2 billion to $47 billion. It started with software that underwrote loans and lines of credit up to $100,000. Now the software can be used for loans and lines, SBA and non-SBA, up to $250,000. It recently launched support for business overdraft protection. It will soon offer business credit cards. Later this year it will begin making agriculture loans, which it already supports for one bank, and business lending of up to $1 million.
During the government shutdown in December and January, a Numerated client — Seacoast Bank in Stuart, Fla. — had a government contractor customer that was not getting paid and was two days away from not making payroll and having to shut down, O’Malley said. The contractor called Seacoast and got a loan in 78 minutes using Numerated’s software.
“That is where this is going,” O’Malley said. “As a small business, you have ups and downs. Having a financial partner that can do that for you is amazing.”
Mills praises the Kabbages and OnDeck Capitals of the world for creating the online lending market for small business.
“They opened up innovation in a sector where there hadn’t been a lot of innovation in 100 years,” she said. “My grandfather got a loan from the Bank of Boston in the 1920s, and the process was about the same as it is today. It was a very paper-intensive process, very much about the personal conversation — and that worked well for a long period of time. But it became too costly, so these small banks were pulling back and not servicing the small-dollar loans, and there was this gap.”
But in Mills’ view, some small businesses will continue to want to visit their community bank to have a personal relationship, an adviser and other services in addition to online loans.
“There will be room in the market for a whole set of solutions including the evolution of the community banks,” Mills said.
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