The Small Business Administration is considering a series of rule changes that it hopes will encourage more lenders and business owners to use its loan programs.
In a notice published in the Federal Register Monday, the SBA proposed streamlining the application process for its 7(a) and 504 loan programs and broadening the definition of small business so that more companies could qualify for its programs.
In a news release Tuesday, the agency said it proposed the new measures after "extensive consultation" with lenders and borrowers on how its programs can be improved. Though the SBA has reported record loan volume in recent years, many lenders and borrowers remain reluctant to partner with the SBA because they view its application process as too cumbersome and its eligibility requirements as too strict.
"Streamlining and simplifying has been a key focus of our agency over the last few years," SBA Administrator Karen Mills, said in the news release. "The changes are the latest steps to reduce paperwork burden, with our eye on the larger goal of expanding access to capital and giving entrepreneurs and small business owners the financial resources to grow and create jobs."
Perhaps the most significant change it is proposing is eliminating the so-called personal resource test that essentially forbids the SBA from approving a loan if the borrower has the resources to obtain credit elsewhere — without a government guarantee.
The agency's concern is that many borrowers with significant personal assets are unable to get conventional financing at reasonable fixed rates and, as a result, are either not borrowing or using higher-cost lenders. Eliminating the personal resource test, it said, would help attract a higher caliber of borrower to the SBA programs. It also would streamline the loan process by eliminating regulations used to calculate the amount of collateral required.
The SBA is also proposing to open its programs up to businesses that, under the current rules, do not qualify for SBA-backed financing because they are either too large or their ownership structure does not meet current guidelines.
It is also seeking to relax restrictions on the financing of expenses related to real estate loans. Currently, borrowers using the real-estate specific 504 program can only finance up to nine months of incurred prior to the filing of the loan application. But the agency noted that projects can be put on hold for various reasons — natural disasters, for instance — and it is proposing to eliminate the nine-month requirement and allow borrowers to finance all expenses incurred.
Paul Merski, the chief economist at the Independent Community Bankers of America and the trade group's point person on SBA matters, says he expects the proposed changes to encourage more banks to offer SBA loans. The majority of SBA loans are made by large and regional banks and Merski says the streamlining the paperwork "is the easiest and cheapest way to get more community banks into the SBA" programs.
Comments on the proposed rule changes are due to the SBA by April 26.