The SBA Loan Guaranty Program

Part 2: The LowDoc and 504 Programs

The SBA LowDoc Program was established in 1993 in response to the growing concerns of very small business entities, or micro-businesses, which found SBA-guaranteed financing difficult to access. The difficulty was due to the resistance of most lenders to go through the laborious process of obtaining a loan guaranty for smaller loans of less than $100,000. They found the process to be more difficult for smaller loans due to the fact that they were generally dealing with less sophisticated borrowers, usually with less information available—as well as the glaring fact that these small loans were much less profitable. The SBA responded with a pilot program designed to test alternatives that would ease the documentation requirements of the lenders in processing these loans, and encourage their participation on behalf of smaller borrowers. As a result the LowDoc Program has been a huge success, more than doubling the number of participating small businesses benefitting from the 7(a) Program.

The agency consolidated LowDoc processing in one central location in order to respond to guaranty requests within thirty-six hours, thereby assuring smaller borrowers timely service. The SBA relies on credit scoring tests to make quick determinations on whether to grant a guaranty for these loans. Borrowers must remember, however, that the actual lenders still must approve all loan requests prior to the SBA’s review, and that the program’s reduction-of-information requirement is designed to ease only the lenders’ burden. Most lenders will still require enough data to fulfill their need to thoroughly evaluate a loan request based on their own credit policy. Nevertheless, the LowDoc Program does enable lenders to move forward on guaranty requests with less documentation, reducing their time and effort in facilitating smaller loans.

The 504 Program was authorized by Congress to foster economic development, to create or preserve jobs, and to stimulate small business expansion. The program is offered through SBA-licensed Certified Development Companies (CDCs), which are financial entities (either for-profit or nonprofit) that are responsible for processing loans under this program.

CDCs facilitate 504 loans but are not the direct funding source for the loan proceeds. The CDC works in conjunction with an approved SBA senior lender, which provides at least half of the approved financing. Subordinate financing is arranged by the CDC through the issuance of SBA-guaranteed debentures, which are obtained from public security markets. Since these debentures provide a guaranteed return to their investors, the debenture portion of 504 loans carry a prepayment penalty if repaid during the first half of the loan term. 504 Program financing is available only in ten- or twenty-year terms.

Eligibility for the 504 Program is determined by the net income and net worth of the borrower, which usually allows for more flexibility than with 7(a) Program eligibility. The CDCs add another layer to the approval process for the borrower. The 504 is structured as two loans to provide up to 90% financing for qualified real estate and capital asset financing, although recent program changes have limited loan amounts to 85% for many participants. The borrower is required to provide a minimum 10% equity contribution. Construction or acquisition loans are permitted, but borrowers cannot refinance existing debt with the 504.