SBA changes make smaller loans available

Recently enacted changes to the U.S. Small Business Admin-istration's premier loan program has strengthened the agency's incentives for private sector lenders to make smaller loans more readily available to small businesses.

The changes affect SBA's three primary loan programs: the 7(a) General Business Loan Guaranty program, the 504 Certified Development Company loan program and the Microloan program.

The most significant changes were to the 7(a) program. Under legislation signed into law in late December, the SBA's guaranty percentage is raised to 85 percent for loans up to $150,000, and the guaranty fee structure is simplified. Both changes will make it easier for lenders to make loans less than $150,000.

"These incentives are needed in the credit markets to boost the availability of small business loans under $150,000," SBA Administrator Aida Alvarez said in a news release. "These loans are much in demand by new businesses and entrepreneurs with great ideas for start-ups, yet these are the hardest loans to get. This package of changes will make it easier and more attractive for lenders to make these loans."

The changes appeared in budget and reauthorization bills adopted on the closing day of the 106th Congress. The budget agreement appropriates $901.5 million for agency programs, providing funds for $10.4 billion in Section 7(a) guaranteed loans; $3.75 billion in Certified Development Company loans; and nearly $2.7 billion in venture capital assistance, including $152 million for the New Markets Venture Capital companies.

The small-loan incentives established include revisions to the guaranty fee structure that allow the smallest loan fee to apply to loans up to $150,000 and a change allowing a larger 85 percent guaranty on loans up to $150,000.

Under the 7(a) program, the agency applies a partial guaranty to a loan that's extended to a small business borrower by a commercial lender. The guaranty allows lenders to issue loans to creditworthy small business borrowers who fall outside the lender's normal credit parameters.

More than 5,600 different commercial lenders made SBA-backed loans in FY 2000, when the agency guaranteed more than $10.5 billion in loans.

Under the changes made to the program:

Small loans are now considered to be those for $150,000 (gross amount) or less. The maximum guaranty on these loans is now 85 percent. Previously, small loans were considered to be $100,000 or less and received a maximum guaranty of 80 percent.

The maximum guaranty on loans greater than $150,000 is 75 percent. Previously, loans for more than $100,000 received a maximum guaranty of 75 percent.

The maximum dollar amount that SBA can guarantee has been raised to $1 million from $750,000.

A maximum loan size of $2 million has been established for 7(a) loans. Previously, there was no maximum limit.

The changes also included a simplified loan guaranty fee structure, which replaces the tiered structure in place since 1995. Guaranty fees are paid to SBA by lenders, but the cost is commonly passed on to borrowers. The guaranty fee structure was amended as follows:

For loans of $150,000 or less, the guaranty fee is 2 percent of the guaranteed portion. Lenders are permitted to retain 25 percent of this fee, which is equal to 50 basis points.

For loans greater than $150,000, up to and including $700,000, the guaranty fee is 3 percent of the guaranteed portion. Lenders are not permitted to retain any of this fee.

For loans greater than $700,000, the guaranty fee is 3.5 percent of the guaranteed portion (deferred participation share). Lenders are not permitted to retain any of this fee.

The legislation also establishes prepayment charges for 7(a) loans with maturities of 15 years or more where the borrower voluntarily prepays during the first three years of the loan's term and the prepaid amount exceeds 25 percent of the outstanding loan balance.

The fee is 5 percent of the amount of the prepayment if made in the first year after the loan is made, 3 percent of the prepayment amount if made in the second year, and 1 percent of the prepayment amount if made during the third year.

The legislation also makes some changes in SBA's 504 program.

These loans are used by small businesses to finance fixed assets. Generally, the SBA share of such loan packages amounts to about 40 percent of the project's costs, with the remaining 60 percent coming from the borrower and from a conventional commercial loan.

The biggest change increases the maximum loan limit for the SBA portion of the loan. For loans that meet specified job creation or community development goals, the maximum size was increased from $750,000 to $1 million.

For loans that meet certain public policy goals, the maximum loan size was increased from $1 million to $1.3 million.

The reauthorization package also increased the maximum size for loans under the SBA Microloan program from $25,000 to $35,000, and allows SBA to continue expanding the number of lenders in the program to a maximum of 300. The current maximum is 200, and the current number of participating non-profit lenders is 150.