SBA Announces Loan Program Enhancements
GRAND RAPIDS — The U.S. Small Business Administration has revised its premier loan program, providing incentives for private sector lenders to increase the availability of smaller-sized loans to small businesses.
The changes, included in budget and reauthorization bills adopted on the last day of the 106th Congress, were made to SBA’s three primary loan programs: the 7 (a) General Business Loan Guaranty program, the 504 Certified Development Company (CDC) loan program and the Microloan program.
The most significant changes were made to the 7(a) program, which provides loans to small businesses unable to obtain them on reasonable terms through traditional lending channels. Under the 7(a) program, the SBA applies a partial guaranty to a loan a commercial lender gives to a small business borrower, thus sharing the risk with the lender. The new amendments established a maximum 7(a) loan size of $2 million, whereas no maximum limit had previously been set.
The SBA bill raises the guaranty percentage to 85 percent for loans up to $150,000 and simplifies the guaranty fee structure to allow the smallest loan fee to apply to loans up to that amount.
Previously, small loans were considered to be $100,000 or less and received a maximum guaranty of 80 percent. Loans under $150,000 have been among the most difficult to get, according to the SBA. The changes are designed to make it easier and more attractive for lenders to make those smaller loans.
The budget provides for $10.4 billion in Section 7(a) guaranteed loans, $3.75 billion in CDC loans and nearly $2.7 billion in venture capital assistance, which includes $152 million for new markets venture capital companies. In addition, $901.5 million is earmarked for agency programs.
The new legislation also revises the agency’s 504 CDC program, which provides businesses with long-term, fixed-rate financing for major fixed assets, such as land, buildings and machinery. A Certified Development Company is a nonprofit corporation set up to contribute to the economic development of its community.
The most significant change in the 504 CDC program is an increase in the maximum loan limit for the SBA portion of the loan. For loans that meet specified job creation or community development objectives, the maximum dollar amount the SBA can guarantee was raised from $750,000 to $1 million. For loans that meet specified public policy goals, the maximum loan size was increased from $1 million to $1.3 million.
The legislation raised the maximum size for loans under the SBA Microloan program from $25,000 to $35,000. The average loan size is about $10,500, according to the SBA. Microloans serve newly established and growing small businesses.
Changes in the Microloan program additionally permit the agency to expand the number of lenders in the program from its current cap of 200 to a maximum of 300. For borrowers who secure additional financing from a second source, the new rules also raise the limit of a borrower’s combined loans from $75,000 to $105,000.
Carol Lopucki, director of the Michigan’s Small Business Development Center at Grand Valley State University’s Seidman Business Services, said there has been a push for these kinds of SBA loan program enhancements for some time.
“Those loans under $150,000 are the typical start-up and new venture kind of loans. The smaller size loans and that whole issue of interest rates and the cap on fees have been three things out there on the horizon that needed to be analyzed,” Lopucki told the Business Journal.
Without a track record, new ventures have greater difficulty securing loans of up to $150,000 due to credit risks.
Because there are more and more technology-related new ventures, the kinds of loans are changing too, Lopucki pointed out. The old paradigm of manufacturing, with manufacturing equipment and buildings as collateral, has changed.
Furthermore, it takes more banks to cover the demand for loans under $150,000, and smaller loans require the same amount of servicing as do larger loans, so servicing is a big issue for banks, she said.
The lenders who do a lot of SBA lending will likely be on the front lines in getting out the word on SBA loan program enhancements. In fiscal 2000, the SBA backed more than $10.5 billion in small business loans extended by more than 5,600 commercial lenders.
“There are lenders in each of the banks who will definitely use this as a tool to further enhance transactions with young companies,” Lopucki said.
“The next piece of it will be getting all the small business service providers, like ourselves, tuned in on all the specific changes," she said. "Then, as we’re working with clients, to talk to banks that we know will be aggressive in utilizing this.”
Revisions to SBA programs will be addressed at a statewide lenders' conference in Lansing March 1, geared to lenders and business service providers, such as SBDC, Women’s Business Center and SCORE business counselors.
Lopucki said the SBDC office plans to provide instruction at the local level with a new lender training session in early spring.