After decreasing funding for the SBA's 7(a) Guaranteed Loan Program last year, President Bush did not allocate any additional funding for the program in his current budget proposal released last week. With the passage of S.141, however, entrepreneurs might not feel the lack of budget dollars so severely.
To respond to last year's budget cuts, the SBA placed a new cap on loans disbursed to small-business owners wanting to make business improvements such as expanding or buying new equipment, reducing the maximum loan amount from $2 million to $500,000. While no additional money is available for the 7(a) program, the Senate is hoping to enable, but not require, the SBA to increase its 7(a) cap. Sen. Olympia J. Snowe (R-ME), new chair of the Senate Committee on Small Business and Entrepreneurship, has sponsored S.141, a bill recently passed by the Senate which would make more money currently in the 7(a) budget available for loans.
"Within the 7(a) program, there are monies that are set aside to cover any losses that occur from 7(a) loans," explains Craig Orfield, communications director for the Senate Committee on Small Business. "In other words, if we issue a loan that, for whatever reason, that applicant cannot repay, the federal government has to repay the portion that the commercial bank [lender] has lost. Historically the federal government has been setting aside an excessive amount of money for that [repayment] fund, so essentially you've got billions and billions of dollars being kept in a pot for potential losses that are never paid out because this is a very well-performing program."
S.141, now awaiting its day in the House, would reconfigure the calculation used by the government to set aside money in this repayment fund, freeing up approximately $1.2 billion to be used for 7(a) loans, for a total of $10.5 billion to $11 billion in available 7(a) funding. Orfield says prospects are good that the House will act on the legislation this month, and, if approved by both the House and the president, the new configuration could be enacted immediately.