President Bush’s proposal to effectively halve the U.S. Small Business Administration’s flagship loan program next year has drawn the ire of lenders and small-business advocates since the administration’s budget was released in February.
Although Bush proposed a small increase in the SBA’s overall budget, his budget also calls for a sharp increase in the "subsidy rate" for the SBA’s 7(a) loan program. With the rate increase, the SBA would be able to guarantee just $4.8 billion in loans under the 7(a) program, down from nearly $10.7 billion in fiscal 2002.
Members of Rhode Island’s Congressional delegation have vowed to press for additional funding to restore the prospective cuts.
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"Small businesses are the backbone of Rhode Island’s economy," Rep. James Langevin said during a House Small Business Committee hearing last month. "I would strongly urge the (Bush) Administration to submit a proposal that sufficiently addresses the needs of the small-business community."
But what happens if the efforts to restore the funding prove fruitless?
"We have a need to shore up deals that have collateral shortfalls, and the way we do that is through the SBA," said William Beauchene, vice president of business banking at Sovereign Bank New England. "If that pool of money dries up, it would absolutely have an effect on our ability to finance those people."
The 7(a) loan program allows the SBA to guarantee up to 85 percent of loan amounts granted by lenders. It is an important source of working capital for business owners who have trouble obtaining funds through other channels. In Rhode Island, 961 small businesses were granted $94 million in loans through the 7(a) program last year, according to the SBA district office in Rhode Island.
SBA officials in Washington have tried to ease concerns by offering a plan to prop up the 7(a) program, should Congress choose not to appropriate more money for it.
Its primary remedy: to move some borrowers from the 7(a) program into the SBA’s lesser-used 504 program, which provides access to loans for real estate transactions, building expansions or purchase of fixed assets like machinery and equipment.
In Rhode Island, more than $10 million in financing under the 504 loan program was made available between October and February, according to the Rhode Island SBA office. The 504 loans are administered through the Ocean State Business Development Authority.
Hector Barreto, the new U.S. SBA administrator, reportedly estimates that as much as 40 percent of 7(a) borrowers nationally apply to the 504 program instead.
That might take some pressure off the 7(a) program. But for many small businesses, the 504 program is not an option.
"The issue with the 504 program is that it’s not for startup businesses that need working capital," said Russell Gaston, commercial lending manager at Coastway Credit Union in Providence, the state’s fifth-largest SBA lender. "If there are cuts (to the 7(a) budget), those businesses could be shut out of the market," said Gaston, who estimated that roughly a quarter of Coastway’s clients could be switched from the 7(a) program to the 504 program.
Another problem: The 504 program generally is more expensive, Beauchene said, because it often involves closing costs and legal fees.
"It’s a very nice program, but it can get expensive with the ancillary fees that come into play," Beauchene said. "Unless the deal is worth at least $300,000 or $400,000, it doesn’t make sense economically."
The U.S. SBA also has suggested it could carry over as much as $2 billion worth of 7(a) loan guarantees from this fiscal year in order to pick up the slack in fiscal 2003.
