INTRODUCTION TO THE LOSS REPORT

 

 


The FY 1996 SBA Loss Report has been redesigned to better meet the needs of Agency Management.  This report serves as a management tool for the analysis of the Agency’s loss experience for various loan programs of the SBA.  The Loss Report focuses on the actual losses as a percentage of disbursements made to date on SBA loan programs.  Included in this year’s report is a disclosure of the Agency’s historical losses plus activity for the past two years.  The presentation has been streamlined to allow the user, at a glance, to review historical and current data, for each of the Agency’s primary lending programs. 

 

The concept of charge-off deserves some explanation.  The SBA has an extensive debt servicing and collection plan to assure maximum recovery of loans made.  Therefore, all reasonable efforts are made by the Agency to fully collect the debt prior to charge-off.  This effort included the use of modern collection methods and the acquisition and sale of collateral through liquidation processes.  Only after the Agency has exhausted these collection methods does SBA classify a loan as charged-off.  For guaranty loans, the loan must first be purchased from the participating lender before this classification can be made.  Also, charge-off is a reportable status assigned to a debt of the Agency.  The assignment of this status does not preclude the Agency from further collection remedies if it is determined that these efforts would result in additional collections to the Agency.  It should be noted that cumulative charged off loan amounts are principal only.

 

In addition, the “costs of doing business” related to SBA’s lending programs have been addressed.  Also considered are losses on the sale of “ColPur” (Collateral Purchased), e.g., real estate and other property that have been acquired by the Agency due to borrowers’ loan defaults.  These and other additional costs, when factored into the traditional actual – loss calculations for fiscal years since 1992, give a truer picture of the component costs associated with the overall SBA lending programs. 

 

Finally, it should be noted that data from SBA’s mainframe and general ledger were utilized to complete this report. 

 

 

 

 

SBA LOAN PROGRAMS

 

 

General Information

 

Direct Loans are available only to certain special categories of borrowers who are unable to obtain lender participation loans.  Direct loans are disbursed directly from SBA funds.  Direct loans have an administrative ceiling of $150,000 in amount.  Currently, SBA only lends directly in the Microloan Business Program and the Disaster Loan Program.

 

Immediate Participation (IP) Loans are those made jointly by SBA and private lenders.  SBA’s participation is administratively limited to 75% or $150,000, whichever is less.  IP loans are permissible only when a guaranty loan is unavailable to the borrower.  This program is seldom used, and for the purposes of the loss study, these loans are included in the Direct Loan category.

 

Guaranteed Loans are made and disbursed by private lenders and guaranteed (generally up to 75%) by SBA.  Upon default on the loan by the borrower, SBA will purchase an agreed-upon share of the unpaid balance of the loan.  Maximum exposure allowable for SBA on a General Business guaranteed loan is $750,000.

 

Loan Proceeds may be used to establish a new business or to assist in the operation, acquisition or expansion of an existing business.  Uses may include working capital; the purchase of inventory, machinery and equipment; and the construction, expansion and rehabilitation of business property.

 

Loan Maturity varies according to the prudent economic life of the assets being financed, subject to the following maximums:

 

Working Capital- 7 to 10 years

Machinery and Equipment- 10 to 25 years

Building Construction or Purchase- 25 years

 

Interest Rate is set quarterly by Central office for direct loans.  Guaranty loan rates may not exceed the New York prime rate by more than 2.25% for loans with a maturity of under 7 years or 2.75% for loans with a maturity of 7 years or more.

 

The above information applies to Business loans.  Disaster loans are covered in a separate section of this report.

 

Note:  All guidelines are of a general nature and subject to exceptions.

 

 

GENERAL BUSINESS PROGRAM

 

Defined under Section 7(a) of the Small Business Act, the 7(a) program is now more accurately called the General Business Program and is by far the largest of SBA’s lending programs, accounting for approximately 85% of all loan disbursements.

 

General Business loans are always guaranty loans.  The IP and direct loan programs for general business loans were discontinued in 1993.  General Business loans in this report include Economic Opportunity, Small Business Energy, Handicap Assistance, Veterans, Pollution Control and Import Export loan programs. 

 

 

DEVELOPMENT COMPANY PROGRAM

 

The Development Company program is actually a grouping of four separate and distinct lending programs defined under Section 7(a)(13) of the Small Business Act and Title V of the Small Business Investment Act.  In general, all four programs consist of loans made through development companies for the purpose of fostering economic development in both urban and rural areas.

 

Section 501 (State) development companies are funded by a partnership arrangement between SBA and state governments.  State development company loans are direct in nature.  This program has not been in effect since 1982.

 

Section 502 (Local) development companies were similar in nature to the 501 Loan program, only local, rather than state, governments are involved.  The 502 program was discontinued in 1995.

 

Section 503 and 504 (Certified) development companies provide fixed asset financing to small businesses for the construction or rehabilitation of owner-occupied or leased premises.  These are guaranty loans only.  The Section 503 program was discontinued in 1986 and was replaced by the Section 504 program.

 

 

SMALL BUSINESS INVESTMENT COMPANIES

 

SBA’s Small Business Investment Company (SBIC) program provides long-term loans and/or venture capital to small firms.  SBICs are privately owned and operated investment companies that are licensed and regulated by SBA.  Venture capitalists participate in the SBIC program to supplement their own private capital with funds provided through SBA’s guarantee of SBIC debentures and preferred securities that are sold to private investors.  SBA also licenses specialized SBICs (SSBICs), which specialize in meeting the needs of small firms owned by socially or economically disadvantaged persons.  In addition to debentures and preferred securities, SSBICs may also leverage their own private capital by selling SBA non-voting preferred stock.  SBICs also issue participating securities that are guaranteed by SBA and that provide SBA potential revenue for its guarantee of timely payment of amounts due to the debenture holders.  The following types of investments are commonly used by SBICs:

 

Loans with Warrants:  SBICs may make loans in return for warrants that enable them to purchase common stock, usually at a favorable price, during a specific period of time.

 

Convertible Debentures:  SBICs may make loans with a conversion feature whereby the debenture can be converted, at the SBICs option, into an equivalent amount of common stock.

 

Stock:  SBICs may purchase common or preferred stock from small firms.

 

Partnership Interests:  SBICs may purchase a limited partnership interest in a partnership.

 

 

DISASTER LOAN PROGRAM

 

Under the Disaster loan program, business owners, individuals and nonprofit organizations are eligible for SBA financial assistance to repair the damage caused by natural disasters, such as hurricanes, floods and tornadoes.  When the President or the SBA Administrator declares a specific area to be a disaster area, two types of direct loans are offered by SBA:

 

Physical Damage Disaster Loans are available to homeowners, renters, large and small businesses and nonprofit organizations.

 

Economic Injury Disaster Loans are made to small businesses and small agricultural cooperatives that suffer substantial economic injury because of a physical disaster.

 

Interest rates on Disaster Home loans are handled differently than other loans.  If a borrower is deemed able to obtain credit elsewhere, the interest rate may not exceed 8%.  For borrowers that cannot obtain alternative financing, the interest rate may not exceed 4%.  Loan maturity is also based on credit eligibility.  Disaster Business loan borrowers eligible for credit from other sources generally receive loans with a maturity not to exceed 3 years.  Those borrowers that are unable to secure credit elsewhere can receive loans with a maturity of up to 30 years.

 

 

MICROLOAN PROGRAM

 

On October 28, 1991 the President signed Public Law 102-140, the Commerce, Justice, State, The Judiciary, and Related Agencies Appropriations Act of 1992.  Section 609 (h) of that law added a new subsection (m) to section 7 of the Small Business Act, 15 U.S.C. 636 (the Act).  The new subsection authorized the Small Business Administration (SBA) to establish the Microloan Demonstration Program.

 

The purpose of this program is to assist women, low income and minority entrepreneurs, business owners and other such individuals possessing the capability to operate successful business concerns and to assist small business concerns in those areas suffering from a lack of credit due to economic downturn.

 

SBA will make direct loans to eligible and qualified intermediary lenders who will use the loan proceeds to make short-term, fixed interest rate microloans, particularly loans in amounts less than $25,000 for start-up, newly established and growing small business concerns.  In conjunction with the loans made to intermediary lenders, SBA will make grants to such intermediary lenders to be used to provide intensive marketing, management and technical assistance to microloan borrowers under this program.  In addition, SBA is authorized to make limited grants to eligible and qualified non-profit entities to provide marketing, management and technical assistance to help low income individuals obtain, with or without loan guarantees, private sector financing for their small businesses.

 

This program, in accordance with the 1991 legislation, was effective for five (5) years.  Currently, the program has been reauthorized through 1997.

 

 

 

 

 

 

SBA LOAN LOSS REPORT

 

SECTION I

 

 

Actual Losses

On Pre Credit Reform and Credit Reform Loans

(Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Business Loans

Direct/IP

Guaranteed

Program Total

 

 

 

 

 

 

 

 

Disbursements

 

 

 

Balance as of 1994

$5,505,874,431

$53,742,446,214

$59,248,320,645

  FY 1995

$13,498,654

$6,170,216,759

$6,183,715,413

  FY 1996

$1,712,058

$3,724,198,149

$3,725,910,207

Cumulative Disbursements

$5,521,085,143

$63,636,861,122

$69,157,946,265

 

 

 

 

 

 

 

 

Charged Off Loans

 

 

 

Balance as of 1994

$1,044,807,116

$4,262,489,211

$5,307,296,327

  *FY 1995

$26,966,921

$208,360,276

$235,327,197

  1996 Loan Principal

$10,533,436

$258,028,179

$268,561,615

  1996 Judgment Principal

$740,114

$6,011,721

$6,751,835

  1996 Other Receivables

$2,812,872

$2,351,142

$5,164,014

Cumulative Charged Off Loans

$1,085,860,459

$4,737,240,529

$5,823,100,988

 

 

 

 

 

 

 

 

Recoveries

 

 

 

Balance as of 1994

$53,481,345

$152,819,383

$206,300,728

  FY 1995

$3,040,506

$13,632,109

$16,672,615

  FY 1996

$2,171,957

$18,716,755

$20,888,712

Cumulative Recoveries

$58,693,808

$185,168,247

$243,862,055

 

 

 

 

 

 

 

 

Actual Net Losses

 

 

 

Cumulative Charged Off Loans Net of Cumulative Recoveries

$1,027,166,651

$4,552,072,282

$5,579,238,933

 

 

 

 

 

 

 

 

Actual Loss Rate

18.60%

7.15%

8.07%

  (Actual Losses/Disbursements)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Loan Principal, Judgment Principal and Other Receivables shown in aggregate for FY 1995.

 

 

 

 

 

Development Company Loans

Direct/IP

Guaranteed

Program Total

 

 

 

 

 

 

 

 

Disbursements

 

 

 

Balance as of 1994

$696,140,948

$4,600,855,414

$5,296,996,362

  FY 1995

$0

$1,023,934,719

$1,023,934,719

  FY 1996

$0

$1,509,223,398

$1,509,223,398

Cumulative Disbursements

$696,140,948

$7,134,013,531

$7,830,154,479

 

 

 

 

 

 

 

 

Charged Off Loans

 

 

 

Balance as of 1994

$176,011,325

$74,456,381

$250,467,706

  *FY 1995

$5,266,434

$19,545,451

$24,811,885

  1996 Loan Principal

$2,815,570

$22,133,045

$24,948,615

  1996 Judgment Principal

$5

$228,332

$228,337

  1996 Other Receivables

$242,929

$19,901

$262,830

Cumulative Charged Off Loans

$184,336,263

$116,383,110

$300,719,373

 

 

 

 

 

 

 

 

Recoveries

 

 

 

Balance as of 1994

$6,218,424

$2,976,028

$9,194,452

  FY 1995

$281,700

$713,251

$994,951

  FY 1996

$467,633

$564,826

$1,032,459

Cumulative Recoveries

$6,967,757

$4,254,105

$11,221,862

 

 

 

 

 

 

 

 

Actual Net Losses

 

 

 

Cumulative Charged Off Loans Net of Cumulative Recoveries

$177,368,506

$112,129,005

$289,497,511

 

 

 

 

 

 

 

 

Actual Loss Rate

25.48%

1.57%

3.70%

  (Actual Losses/Disbursements)