Some rest for the paperwork-weary - new Small Business Administration loan application procedure

Nation's Business, June, 1994 by Laura M. Litvan

The SBA is testing a simplified application process for guaranteed loans up to $100,000.

In 1979, after a tornado damaged many buildings in Wichita Falls, Texas, Larry and Anna Jo Darnell applied for a loan guaranteed by the U.S. Small Business Administration to help pay for repairs to their pizza restaurant.

Fifteen years have passed since the Darnells, co-owners of Momma Jo's and Zeno's Pizza, applied for and received their $72,000 loan, but for Larry--who handled the associated paperwork--the process is not easily forgotten. He worked with a loan officer at his bank for four weeks, filling out paperwork, gathering a sheaf of business documents required for the SBA's consideration, and waiting for an answer from the government.

So it is understandable that Darnell was taken aback when he returned to his bank earlier this year to apply for another SBA-guaranteed loan and completed the process in a virtual flash. He simply filled out the front and back of a single-sheet loan form and provided a few materials, including his company's balance sheet. He asked for $50,000 to buy new equipment and expand the six-employee business to handle contracts won recently to operate cafeterias in three local factories.

Darnell's bank approved the loan the Tuesday he applied, and a loan officer faxed his application to the SBA. On Friday, the agency informed him that the loan would be guaranteed, meaning that the SBA would cover 75 percent of the funds in the event of a default.

"When the SBA acted so fast, I was startled, after having applied for an SBA loan before," says Darnell. "Right now, I can't say enough good things about the process."

The Darnells are among hundreds of small-business owners who have participated in recent months in an SBA pilot project that lets prospective borrowers use a simple, one-sheet application for guaranteed loans of up to $100,000. The project is under way in Texas, Louisiana, Arkansas, Oklahoma, and New Mexico.

SBA officials have told Nation's Business they are preparing to take the reduced-paperwork approach nationwide.

"We've been criticized often and loudly over the years for our loan applications being too voluminous, too hard to handle, too difficult to get through--take your pick," says Mike Stamler, an SBA spokesman.

To address the long-standing complaints, Erskine Bowles, a former North Carolina banker who became the agency's administrator in May 1993, initiated the pilot program. It began in the San Antonio area last August, and early this year it was expanded to include all of Texas and the other four states.

Not surprising, the pilot project has been well-received by paperwork-weary entrepreneurs. In addition, SBA officials have found that many bankers are more willing under the pilot program to help customers finance business expansions.

Typically, bankers have been wary of relatively small SBA loans because they've viewed the lengthy documentation required by the government as not worth the effort, says Rodney Martin, director of the SBA's district office in San Antonio. "We had just kind of frozen out a substantial part of the small-business community," he says.

Another advantage of the shortened loan form is that, under the pilot program, the SBA has been able to approve or reject an application in a few days, rather than a week and a half under its traditional approach to small loans.

That traditional approach has been to treat small loans as if they carry the same degree of risk for banks and the SBA as do larger loans. The typical SBA loan application is three sheets, front and back, and must be accompanied by a number of supporting documents, which can make most applications over an inch thick. Required documents include the business owners' stated purpose for wanting a loan, resumes for top managers, owners' personal financial statements, a schedule of term debts, and information about accounts receivable and payable.

In the pilot program, loans under $50,000 require only the single-sheet application form. Borrowers who, like the Darnells, seek from $50,000 to $100,000 also use the one-sheet form, but a few extras are required as well. These include the company's corporate tax returns for the past three years, personal financial statements of the loan guarantors, and the bank's own internal report about the business-loan applicant's financial health.

Generally, it is the smallest of small businesses that need loans of less than $100,000, says the SBA's Martin. And those are typically the firms that are taking advantage of the pilot program. Each week, about 75 to 80 San Antonio businesses, most with no more than five employees, use the shortened forms to apply for loans, he says.

About 300 banks in Martin's SBA district are registered to participate in the pilot program, including many lenders who earlier had little interest in seeking SBA guarantees for smaller loans.

One such banker is Terri Saenz, vice president of Texas Bank, N.A., of San Antonio. Before the pilot program began last August, her bank made plenty of small loans, she says, but it was frustrating at times to use the paperwork-intensive approach for small SBA-guaranteed loans. Some applications were as thick as three inches once all the supporting documents were attached, she says. For that reason, her institution tried to steer applicants toward direct loans from the bank rather than SBA-guaranteed loans. The direct loans generally require more collateral and have shorter repayment terms.