Entrepreneurs are not sure what to make of the bill signed by
President Bush in December to eliminate the $79 million federal
subsidy for the SBA's loan guarantee program-and with good
reason. Before the ink was dry, the spin was flying. One side,
aligned with the White House, called it a small-business-friendly
legislative compromise that would save the SBA's 7(a) program
by making it "self-sustaining." The other side saw it as
an unnecessary tax on small-business borrowers.
They're both right to some degree. Congress raised the
program cap to $16 billion from $12.5 billion, and restored the
maximum SBA guarantee on 7(a) loans from $1 million to $1.5
million. But making the program self-sustaining ultimately means
higher fees for borrowers and lenders, who will now subsidize the
program in place of the federal government, with the SBA in the
role of facilitator.
Borrowers will pay twice as much-now 2 percent-in fees to take
out a 7(a) loan of $150,000 or less. And fees on larger loans up to
$700,000 increased to 3 percent from 2.5 percent. But Mike Stamler
of the SBA maintains that this is not actually a fee hike, since
rates were only temporarily reduced in December 2001. He adds that
the fee difference is nominal.
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But others say the reason fees were reduced in 2001 (the
reduction took effect in 2002) was that they were too high, and
frustrated lenders were threatening to pull out of the program,
recalls David Bartram, president of U.S. Bank's San Diego-based
SBA division. "That doesn't mean [fees are] not too high
now," he says, adding that, had the $79 million subsidy
remained, fees could have remained at the lower rate. The 2 percent
fee is a potential hardship for the smallest borrowers, he says,
and a loan of $2 million--the maximum the program allows--costs a
borrower about $50,000 in fees. "That's substantially more
than what somebody pays for a conventional loan."
Bartram predicts that some small-business owners will opt for
conventional lower-fee loans, albeit with less favorable terms than
7(a) loans. However, given that the program was designed primarily
as a lender of last resort for those who don't qualify for
conventional loans, those borrowers may have no choice but to choke
down the higher fees. "What other viable option do they
have?" asks Kristie Darien, director of government affairs
with the National
Association for the Self-Employed. Beyond dipping into savings
or tapping generous relatives, entrepreneurs are left to use credit
cards with "ridiculous" interest rates of 12 to 24
percent, she says.
There will likely be more costs ahead for 7(a) loans. Some banks
will pass along a portion of their fees to customers in their loan
product pricing. "You'll probably see some interest rate
increases," says Tom Schneider, president and CEO of
Pathfinder Bank, a $300 million community bank in Oswego, New York.
Schneider says he hopes to do more SBA loans this year, but smaller
lenders may leave the 7(a) field rather than try to make up the
difference.
Bigger banks may even have to tighten up their lending criteria
to increase profitability, says Bartram. As a result, "there
are going to be a certain amount of small businesses that could
have gotten financing last year that won't get [any] this
year," he says. And looking ahead, there's the risk of
higher fees now that the program has no federal subsidy.
But Bartram and other lender representatives still call the new
legislation positive, since it's keeping the 7(a) program
alive. And because it's being subsidized completely by lender
and borrower fees, with the higher program limit of $16.5 billion,
entrepreneurs will be spared the temporary program suspensions and
emergency caps seen over the past two years. "This stabilizes
the program for the first time in a long time," says Tom
Burke, national program director for Wells Fargo SBA Lending.
"The funding source may have changed, but the program
continues to be viable."
That's true at least for the next two years, assuming the
2006 budget doesn't make any changes. But as for 7(a)'s
future health-and the current administration's interest in
keeping it going-Capitol Hill observers say the jury is still
out.
C.J. Prince is executive editor of CEO Magazine. She
can be reached at .