SBA-backed loans just got costlier - Small Business Administration - Small Business Lending Enhancement Act of 1995

Nation's Business, Feb, 1996 by J. Tol Broome, Jr.

While the Small Business Administration is forecasting record demand this year for its popular loan-guarantee program, banks that participate will take on higher risks, and borrowers will pay higher fees.

The cost of doing business with the SBA went up after Congress slashed the agency's 1996 budget by 35 percent. Adjusting to the budget cuts while protecting the guaranteed-loan program resulted in the shifting of some costs to banks and borrowers. The changes took effect in October when President Clinton signed into law the Small Business Lending Enhancement Act of 1995.

Under the guaranteed-loan program, a bank extends a loan to a small business, and the SBA provides a guarantee of repayment for a percentage of the loan amount. The bank receives the added assurance of a government guarantee on the loan, and the small-business owner benefits from more-favorable terms. Among the new law's provisions:

* The up-front guarantee fee paid to the SBA by the bank but typically passed on to the borrower) will remain at 2 percent for loans of $100,000 or less. On loans of more than 100,000, the guarantee fee will be computed on a sliding scale of 3 percent of the first $250,000, 3.5 percent of the next $250,000, and 3.875 percent of the remaining guarantee amount.

* Guarantee fees for loans of $50,000 or less will no longer be split with the bank. Previously, the lender kept half of the 2 percent fee.

* Banks will pay the SBA a new 0.5 percent annual fee on the amount of the outstanding balance of the guaranteed portion of the loan. While banks may not charge the fee directly to the borrower, they may boost the loan rate to offset the fee payment.

* The percentage of a bank loan that the SBA guarantees to repay upon default has been lowered. For loans of $100,000 and under, the maximum guarantee dropped to 80 percent from 90 percent. For loans over $100,000, the SBA guarantee dropped to 75 percent. Before the revision, the maximum guarantee percentages were 90 percent for loans of $100,000 to $155,000; 85 percent for loans of $155,000 to $350,000; and 80 percent for loans of 350,000 and up.

The act also contained some good news for small-business borrowers. The guarantee cap of $400,000 that was imposed during the second half of fiscal 1995 has been removed. SBA guarantees can now be as high as $750,000, which could result in loans of $1 moon or more. In addition, the moratorium on debt refinancing, also imposed during fiscal 1995, has been removed.

Another positive projection is the expected increase in loan volume. SBA Administrator Philip Lader says that, based in part on surveys of lenders, the SBA is forecasting $11 billion in loan guarantees for fiscal 1996, up from the fiscal 1995 total of $8.2 billion.

Says Lader: "While there will be some period of adjustment to the changes, all indications are that demand for SBA loans will continue to increase."

Lader says changes in the loan program were necessary to ensure the long-term viability of the SBA. "The act is a splendid example of the president and Congress achieving common ground in the interest of small business," he says. "There will be $100 million in annual savings to taxpayers as a result of this act.

"Banks and borrowers would certainly prefer not to have added costs," continues Lader. "But if we are to achieve a balanced budget, it is appropriate and necessary for the beneficiaries aries to bear the cost of programs."

Still, some bankers feel that the changes are too drastic. Increasing the maximum loan size and removing the moratorium on refinancing are certainly positives," says Brent Priddy, vice president of BB&T bank in Greensboro, N.C. "On balance, however, the changes may make some banks less likely to do SBA deals. And with the higher guarantee fees, the program is now less attractive to borrowers."

Other lenders see the changes as reasonable. "The risk will be a little higher for banks," says John Prescott, vice president of lending for Napa National Bank in Napa, Calif. "But we have looked at the changes, and we are committed to the SBA program for the long haul."

Prescott says that Napa National may have to raise interest rates on some loans to compensate for the 0.5 percent annual fee to be paid by the bank. But Lader doesn't think higher interest rates and the increased fees for borrowers will keep them from seeking SBA-guaranteed loans.

"Every bank must certify that each SBA-guaranteed loan would not have been made without the guarantee," Lader says. "So, if the loan is not available elsewhere, the borrower should be willing to absorb the guarantee fee."

Genny Rakowitz, vice president and coordinator of SBA loans for Frost National Bank, in San Antonio, agrees. "I don't think a higher guarantee fee will be reason enough for [small firms] not to borrow the money."

J. Tol Broome Jr. is a loan administrator for FirstSouth Bank in Burlington, N.C.