Small Business: Federal legislation boosts SBA's loan fund authority

A perennial question over the last decade at federal budget time has been how much budget authority the U.S. Small Business Administration's 7(a) loan program should receive. The use of the loan guarantee program has grown each year and the agency has always spent every dime Congress and the president have agreed to give it.

The 7(a) program named after the section of the law that created it has been SBA's primary loan guarantee program and job creator. It provides lenders with a way to serve borrowers who present a greater risk and cannot qualify for a conventional commercial loan. Smaller companies with lower prot margins often fall within this category, though they can be the lifeblood of a community or offer new, innovative ideas worthy of nancial support.

Fees have always been charged to both the borrower and lender for the use of the program, but those fees have uctuated based on SBA's losses on the guarantees. Each year, a new appropriation federal tax dollars was always needed to offset the losses on the relatively few loans gone bad, leaving Uncle Sam to pay the balance to the lender.

Because the losses for the 7(a) loan program uctuate, there is always some uncertainty about how much money would, or should, be made available for SBA 7(a) lending from year to year. Forecast models were devised to predict how much money would be needed to subsidize the losses. Many factors are needed to predict whether a business, or business owner, will prosper or fail, and how many will do so in a given year. Even the best of models often has created crisis situations the program money running out that have prompted the agency to ask for budget supplements (more money before the end of the year) to fund the loan volume. This situation has often created angst for legislators, budget makers and lenders using the program.

Last scal year, SBA did a record number of 7(a) loans for a record $12.55 billion spending a higher budget authority than ever before. For the current year, President Bush has signed legislation boosting the authority to $16 billion, and SBA's budget legislation increases the per-loan guarantee from $1 million per loan to $1.5 million. More loans mean more jobs, and few disagree with the 7(a) program's positive impact on the economy.

This year's bill has an added bonus it resolves, once and for all, the angst surrounding the program's viability and sustainability by allowing loan fees charged the borrowers and lenders for use of the program to revert to their scal year 2002 level. This change means the taxpayer will no longer subsidize the program and no appropriation of general tax dollars will be necessary to support its lending authority. The 7(a) lending program will be self-sustaining.

Borrower fees for the guaranteed portion of 7(a) loans were returned to 2 percent from 1 percent on loans up to $150,000 and 3 percent from 2.5 percent on loans of $150,001 to $700,000. A new fee of 0.25 percent was added to loans more than $1 million and up to a new higher maximum loan of $1.5 million. Lender fees also are increasing.

The fees are modest. For the average loan of $161,600 over 10 years at 6 percent interest, it would be a difference of only $6.73 a month if nanced in the loan or $606 extra in up-front fees.

SBA's 504 loan program has been a zero appropriation program for years and continues as a strong loan program to make larger, longer-term, xed-asset nancing available to small businesses creating jobs. The two programs combined are authorized next scal year to make more than $21 billion in guarantees available to small businesses through the SBA.

While it will take some getting used to for users of the program, in the long run the increased viability of the 7(a) guarantee lending program, and the end of its reliance on annual appropriations, will make the program stronger, increase its longevity, and ensure more Americans a chance to start and expand small businesses.

Sam Jones is the Region VII SBA Administrator.