The SBA Offers Sweeteners to Encourage More Small Loans

Although the numbers dropped a bit in fiscal 2013, the Small Business Administration’s two primary loan-guarantee programs have been on a roll lately. They topped $30 billion in fiscal 2011 and fiscal 2012, setting agency records, according to the agency’s acting chief, Jeanne Hulit.

But smaller-dollar-value loans have been decreasing over the past three years, with growth in the programs coming from larger loans. “It’s the smallest of the small loans that have declined. The number of loans is down, but the dollar amount is up,” says Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders, an industry organization representing lenders that specialize in 7(a) loans, one of the SBA’s two primary loan programs.

That’s a problem for the economy, because smaller loans tend to finance startups. And they are disproportionately taken out by women, minorities, and veterans, something Hulit emphasized when she announced a plan this week to waive some fees and reduce others for loans of $150,000 and less.

The agency is waiving its upfront, 2 percent loan-guarantee fee for those smaller loans and reduce a monthly guarantee fee paid by the lenders by 310 of a percent. The SBA didn’t announce an end date for waiving the fees.

The changes mean small business owners borrowing $150,000 will no longer have to come up with $2,550 in upfront fees at the time the loan closes. That will help many of the Main Street retailers, service businesses, craft breweries, and car dealerships that apply for SBA-guaranteed loans at the Bank of Montana’s Missoula branch, where Kimberly R. Shappee is a senior credit officer. “It’s awesome. For small business owners who are just getting started, this will be a significant savings. We’ll be able to help them grow into significant employers in our area.”

Her bank is likely to get word out about the fee waiver through blog posts on its website and communications to its current SBA borrowers, who are the most likely businesses to use the SBA loan programs again, she says.

Cece Mitchell, a senior vice president and SBA lending manager at Zions Bank in Utah, says the sweeteners will help both small business borrowers and the financial institutions that lend to them. “The borrower is able to keep [money] in their company for operating capital, rather than paying the fee. For many companies, that will help pay utilities, perhaps enable them to perform needed maintenance, or pay part of a salary for an employee,” Mitchell writes in an e-mail. “The hidden benefit is that the guarantee fee waiver is based on the loan amount, not the size of the borrower. Therefore, many midsize companies will benefit as well.”

Reducing the cost of SBA-guaranteed loans, which are typically more expensive than regular bank loans, will make them more attractive to lenders, Mitchell writes. “It means we are able to retain interest income to offset our costs of running the program. This breaks down one of the barriers for lenders to enter the SBA lending arena.”

An ongoing effort to simplify the application underwriting process and reduce paperwork has already increased the number of lenders participating in the 7(a) loan program, Hulit said in her announcement. The number of active lenders in the Small Loan Advantage program, which expanded access to 7(a) loans, has gone from 74 to 681 in recent years.

The combination of less paperwork and reduced cost should increase the number of small-dollar loans made over the coming year, Wilkinson says. That may push the agency’s loan totals back into record territory.

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