Looking Ahead

The 7(a) is the SBA's most popular program--not surprising, since the loans are given to small businesses that have already been turned down by other lenders. In fiscal 1996, the agency made some 46,000 guaranteed loans totaling $7.7 billion. For loans over $100,000, the SBA guarantees 75 percent of the total up to $750,000; for loans up to $100,000, the guarantee is 80 percent.

The advantage of 7(a) loans is that they can be paid back over as long as 25 years for real estate and 10 years for equipment and working capital. Interest rates are a maximum of 2.25 percent over prime if the loan term is less than seven years and 2.75 percent if over seven years.

Banks package the guaranteed portion of about half these loans and sell them in the "secondary market." The SBA receives a fee from the bank based on those sales. That money helps defray 7(a) costs, reducing the federal appropriation needed.

The White House Office of Management and Budget (OMB) each year establishes a "subsidy rate," which reflects the amount of reserve the SBA must have to cover losses from its loans. A subsidy rate of 2.74, for example, means Congress must appropriate $2.74 for each $100 of SBA lending authority.

In the SBA's fiscal 1996 budget, Congress had set a subsidy rate of 1.06 for the 7(a) and zero for the 504. But when President Clinton proposed his fiscal 1997 budget in February 1996, he calculated a 2.68 percent and 6.85 subsidy rate, respectively, for the programs. That would mean much higher appropriations than Congress was willing to provide.

Rep. Meyers jumped into action. Her bill, which passed Congress at the end of September, gives banks much more authority to collect on defaulted 7(a) loans. The bill also sets a new requirement for 7(a) "Low-Doc" loans--loans under $100,000 that require only a one-page application to the SBA. Just three years after being introduced, the number of Low-Doc loans has ballooned to about 45 percent of total 7(a) loans awarded and to 20 percent of 7(a) dollars lent.

The SBA's John Cox says the Clinton administration has used the program to direct loans to smaller businesses, where it believes the 7(a) program's emphasis should be. But Republicans in Congress believed Low-Doc was growing too quickly. Enter the Meyers bill, which sets a new requirement that only banks with significant small-business lending experience can make Low-Doc loans. Cox, however, does not believe there will be fewer loans approved as a result.

This article was originally published in the January 1997 print edition of Entrepreneur with the headline: Looking Ahead.