Less hassle, more loans - Small Business Administration's low documentation loan program awards loans of under $100,000 using a lot less paperwork - Small Business Financial Adviser - Brief Article

Nation's Business, August, 1995 by J. Tol Broome, Jr.

Two years ago, less than one-third of all applicants for loans guaranteed by the Small Business Administration sought less than $100,000. Today, nearly two-thirds apply for loans under that amount. The sudden burst of interest in small loans is a direct result of the SBA's new program for minimizing the paperwork associated with borrowing money, the SBA says.

The SBA launched its "low documentation" loan program for amounts under $100,000 in July 1994. Prior to the so-called low-doc program, a typical application for an SBA-guaranteed loan required the completion of 10 or more forms and the submission of a narrative description of the business.

By contrast, the low-doc program requires completion of only a one-page form for a loan of $50,000 or less. For a loan above $50,000 to $100,000, the SBA requires four elements:

* A completed one-page application.

* Copies of income-tax returns--Schedule C or the front page of the corporate return--for the past three years (if applicable).

* A personal financial statement from each shareholder who has a 20 percent or larger interest in the company.

* A brief internal loan report prepared by the lender.

During the first eight months of fiscal 1995, through May 31, the SBA had approved 21,453 low-doc loan applications totaling $1.19 billion.

"Before we began to offer the low-doc program, it just wasn't cost-efficient for lenders to go through the paperwork for a loan of under $100,000," says Mike Stamler, spokesman for SBA. If a small-business borrower defaults on an SBA-guaranteed loan, the agency covers up to 90 percent of the loan balance.

As with other guaranteed loans, the borrower works with a bank in formulating the loan request, and the bank submits the application to the SBA. A key objective of the low-doc program is to put more emphasis on the borrower's character, credit history, and projected cash flow, while attaching less significance to collateral and percentage of equity.

"We see some real advantages in the low-doc program," says Dick Rosentiel, director of small-business lending for Today's Bank in Rockford, Ill. "The SBA has emphasized simplicity and rapid turnaround on loan requests--two things that have been greatly lacking in the past with the SBA."

Start-ups are eligible for low-doc loans, as are existing small businesses. An existing business must employ fewer than 100 workers and have average annual sales of less than $5 million.

The interest rate is negotiated between the borrower and the bank, but it may not exceed the Wall Street prime rate plus 2.25 percent for a loan with a term of less than seven years or prime plus 2.75 percent for a loan of seven years or longer. A 2 percent guaranty fee is also collected by the SBA.