One of CountryBank USA's business customers wants to expand its fast-food restaurant and is seeking a $35,000 unsecured loan — the exact type of loan for which the bank would want a Small Business Administration guarantee.
But for the $44 million-asset Cando, N.D., bank, the amount of paperwork and the arduous process of getting the SBA to approve such a small loan makes it not worth the time and effort, according to Terry Jorde, its president and chief executive officer.
"It's overkill," she said.
In mid-December the agency plans to roll out a pilot program in rural markets to address those sorts of hurdles. Under the Rural Lender Advantage program, the SBA is aiming to encourage rural banks to use its 7(a) loan guarantees by streamlining the lending process.
"I didn't think we were doing a real good job at reaching out to the small community banks," said Mick Ringsak, a regional administrator for the agency in Denver. However, "this program will be very simple, very easy to use."
It is being tested in six states, Colorado, Montana, South Dakota, North Dakota, Utah, and Wyoming, and is designed for banks that typically make few agency-backed loans a year.
Applications for loans of less than $350,000 will be two to three pages long and available online and lenders and borrowers can expect the applications to be processed in three to five days. The guarantee is 85% for loans of less than $150,000, or 75% for larger ones.
The SBA is counting on the program to generate 3,000 to 4,000 loans in its first year.
Until 2005 the agency offered a program with simplified documentation. The LowDoc Program was popular among small banks, according to Paul Merski, chief economist for the Independent Community Bankers of America.
"Shortly after that was terminated many smaller banks dropped out of SBA lending," Mr. Merski said.
Ms. Jorde said CountryBank was among them. She said that when it participated in the low-documentation program, it handled three to five SBA loans a year. For the last few years it has averaged about one a year as a direct effect of the agency's change, not because of a slowdown in the local economy, Ms. Jorde said.
"I was one of the bankers that whined the most about losing the LowDoc Program," she said. "The regular program took so much more time. Customers really didn't want to go through the process."
Though rural and small banks dropped away from the SBA, it did not experience a slowdown in lending. According to the agency, it currently guarantees 100,000 loans annually, or double what it did five years ago.
But Mr. Merski said that the loans have been going to big institutions with entire departments dedicated to SBA lending, and that 10 banks make about 60% of all SBA loans. The $1.5 trillion-asset Bank of America Corp. is the nation's largest SBA lender.
According to a press release the agency issued Sept. 27, so far this year about 400 fewer banks have made SBA loans compared with two years earlier, and many of the banks that dropped out have been community and rural ones.
The SBA's Mr. Ringsak said that community banks, particularly those in rural areas, cannot compete for the loans, because their staffs are too small to have a dedicated SBA expert.
In addition, with many of those banks serving as steppingstones for young bankers looking to get experience, there is high turnover, he said, and "it is not worth the expense to keep someone trained in the skill set needed."
Ms. Jorde said the agency's simplified program could help spur economic development in small towns.
"There has been a real drought for businesses in rural areas to get SBA loans," she said. "This will really help us meet the needs of small businesses. I'm really looking forward to using" the program.
