Subsidy rate increase would slash loan guarantees in half
Time is ticking for small business owners who hope to obtain popular government loans. Come Oct. 1, when fiscal year 2003 begins, the U.S. Small Business Administration’s flagship loan program will be effectively slashed in half, barring a last minute budget deal in Washington, D.C.
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Although a small increase has been appropriated in the SBA’s overall budget, the budget also calls for a sharp increase in the subsidy rate for the SBA’s 7(a) loan program – its most prominent and effective loan guarantee 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.
Unless lawmakers broker a deal to save the loan program the effects on the small business community would be drastic, say experts.
One in four businesses in the state has an SBA loan, according to the SBA. This fiscal year, the SBA has given 803 loans to Rhode Island businesses, for approximately $77 million. On average, the Rhode Island district SBA office hands out nearly 1,000 loans and $100,000 dollars per year.
“It’s phenomenal, the use of the program,” said Mark Hayward, district director for U.S. Small Business Administration.
Hayward said he would not discuss whether subsidy rates on 7(a) loans will be raised as planned.
“I cannot comment on the administration’s budget,” he said.
In Washington, lawmakers who vowed to prevent the changes are now saying time is running out.
“It’s an issue that came up during budget hearings, but not much got resolved there,” said Wendy Belzer, a spokeswoman for Congresswoman Nydia Velazquez (D-NY), ranking Democrat on the House Small Business Committee.
“Congresswoman Velazquez has said over and over, ‘I don’t understand these numbers. These numbers are funny numbers. I don’t understand why the subsidy rate can’t be fixed,’” said Belzer.
The 7(a) loan program is the most prominent loan guarantee program managed by the SBA. It provides guarantees for a percentage of the total loan made by commercial lenders to small businesses.
The SBA does not make direct loans to small businesses. Rather, the program provides a level of security for the commercial lenders making the loans by providing them with a guarantee for a percentage of the loan.
The funds for the loan come directly from the lenders participating in this program.
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.
They plan 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.
That might take some pressure off the 7(a) program, say experts. But for many small businesses, the 504 program is not an option: The 504 program generally is more expensive because it often involves closing costs and legal fees.
The 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.
“Rhode Island has one of the highest penetration rates of SBA products to businesses. So you can imagine the impact this could have,” said James Kelshaw, vice president for business lending at BankRI. BankRI is the third top SBA lender in the state for past three years, based on volume and dollar amount. Kelshaw said the changes to the SBA’s 7 (a) loan program will make it more difficult for bankers in general to give out loans to small businesses.
“One-point-five billion dollars have been collected that were not needed to cover default loans, some of which came from borrowers fees. Basically it’s a double taxation on the small business owner,” said Mark S. Deion, president of Deion Associates and Strategies, Inc. “Congress allocated $9.8 billion, but because the subsidy rate was doubled, small business people can’t even get the loans.”
