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Caps Off to You!

More small-business opportunities can flow freely now that the SBA has finally removed its 7(a) loan cap.
June 1, 2003
URL: http://www.entrepreneur.com/article/61908

To talk to insiders who labored to lift the $500,000 cap from the SBA's 7(a) loan program, the process held enough drama to last its players a good long while. The SBA imposed the limit in October after President Bush's proposed fiscal 2003 budget cut in half the amount of loans the agency would be able to guarantee for the year.

But after five months of vigorous lobbying by the U.S. Chamber of Commerce as well as a coalition of small-business organizations--and thanks to the introduction of a new econometric model that will forecast the costs of the 7(a) loan program much more accurately--the SBA finally restored the maximum loan amount to $2 million earlier this year.

Giovanni Coratolo, director of small-business policy at the Chamber of Commerce and the originator of the fight to remove the 7(a) loan cap, was surprised it happened so quickly. "It's amazing because generally legislative efforts take 10 years," says Coratolo, who, back in January, said the cap had only a fifty-fifty chance of being removed.

Although the relatively swift resolution came as a great relief to many, some business owners had to postpone or cancel their plans to expand their companies because the SBA could not back their loans during the $500,000 cap period.

Hitesh Bhakta, chairman of the Asian American Hotel Owners Association (AAHOA), says the $500,000 loan cap made it essentially impossible for some of the AAHOA's members to get bank financing for their projects. "Most local lenders would say, at minimum, you need a million and a half [to build a new hotel]," Bhakta says. "They say 'I have to risk a million? Forget it.'"

In fact, one of the AAHOA's members was preparing to start construction on a new hotel in Southern California, when he learned that his bank wouldn't make the loan because of the SBA cap. "He seriously considered giving up 50 percent of the project to a joint venture partner or a VC," explains Bhakta. "He didn't, and because of the cap reversal, he's in the driver's seat again." But many other entrepreneurs were probably less fortunate.

Still, others wonder whether another 7(a) loan cap could possibly appear in the future. The SBA's Mike Stamler says no. "This is not something we do willy-nilly," he asserts, adding that the organization is as committed as ever to helping small businesses start and grow.

However, the amount of money that has been apportioned to the 7(a) program in President Bush's fiscal 2004 budget is still raising some eyebrows; at $9.4 billion, it's nearly $3 billion less than the fiscal 2002 demand. James Ballentine, director of community development for the American Bankers Association, fought to remove the cap and says the problem lies in the administration because it's pushing for smaller loans.

"The average loan size in 7(a) is $230,000 now. They'd like to get it down to around $175,000," says Ballentine. That amount might be sufficient for some start-ups, he adds, but it won't be as helpful for established businesses seeking to expand. He quips, "I think they're trying to turn this into the 'Very Small Business Administration.'"

Coratolo agrees that focusing on one group or type of small businesses to the exclusion of others is a mistake. "You can't buy a restaurant or hotel for $100,000. It just doesn't exist," he explains. "So you have to be sensitive to the fact that there's a different maturity level within all businesses and that capital, in some cases, is the barrier in going from one level of maturity to the next, whether it's start-up or growth."

Still, Coratolo says the lifting of the cap is a positive step in the right direction, and while the amount budgeted for 2004 seems a bit low, he says demand tends to ebb during periods of economic uncertainty. "In many cases, [businesses] don't want to go too far into debt," he acknowledges. That said, the Chamber of Commerce hopes to add funds to the program by lobbying Congress. The $9.4 billion, Coratolo says, "may be a little on the low side."


C.J. Prince is the executive editor of CEO Magazine. She can be reached at cjprince@chiefexecutive.net.