WASHINGTON -- Small companies that borrowed through the Small Business Administration's Section 503 may soon be able to prepay their loans without the current drastic penalties.

Under pending legislation, all Section 503 borrowers would be allowed to prepay under Section 504's "market-type" prepayment plan - one less dramatically influenced by interest rates.

In a Senate small business committee hearing Tuesday, Chairman Dale Bumpers, D-Ark., had high hopes for the legislation.

"I think we're going to get this bill through very quickly," he said.

The 503 loan program is for small businesses that want to purchase industrial and commercial buildings or equipment.

Borrowers are permitted to prepay the loan only if they pay an amount that can be invested to produce a payment stream that equals the amount of the original debenture.

Strikingly lower interest rates in recent years have meant that prepayment penalties today can be as high as 64% of remaining loan balances.

Penalties under the 504 program - which also finance buildings and equipment - begin at an amount equal to one year's interest if the loan is prepaid within one year of borrowing, followed by a straight line reduction that becomes zero at the midpoint of the 1oan's maturity.

'Looks Egregious'

"Small businesses are penalized a staggering amount for paying a loan that they're current on," said Sen. Bumpers.

When the program began in 1981, he said, "interest rates were through the roof- this was just the thing to do. But now interest rates are lower, and that's why it looks egregious."

The Senate legislation, introduced by Sen. Mark O. Hatfield, R-Ore., would also allow Section 503 borrowers to refinance under Section 504, which would channel more funds from the government sector to private financial markets.

Mr. de Senerpont Domis writes for the Medill News Service.

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