Posted on: Wednesday, January 12, 2005
SBA program now looks sound
By Rob Kaiser
Chicago Tribune
CHICAGO — The U.S. Small Business Administration and its numerous critics appear in harmony for the first time in years.
A likely explanation is the $16 billion stocking stuffer for the SBA's flagship 7(a) loan program, which this year will likely keep it from suffering shortfalls that drew the ire of banks and small-business owners in 2004.
"The risk of a cap or a shutdown is basically nil," said Tony Wilkinson, president of the National Association of Government Guaranteed Lenders and a frequent SBA critic.
Such an outlook is a vast improvement from recent years, when frequent loan limits and speculation about shutdowns sent bankers scurrying to submit loan applications and left many business owners in limbo — often with unpaid bills — when expected loans suddenly evaporated.
To achieve the peace, bankers grudgingly accepted a return to paying higher fees as the Bush administration got its wish to wipe away a nearly $80 million subsidy that had been supporting the 7(a) program. In return, the bankers expect to inherit a more stable program.
Such stability would have saved Julie Valenza a lot of time and money.
Valenza was close to purchasing her second Jimmy John's sandwich franchise last January when the $250,000 loan she expected to secure through the 7(a) program was suddenly stalled after SBA stopped accepting new applications because of a shortage of money.
To salvage the deal to purchase an existing store in Westmont, Ill., Valenza recruited her sister as an investor.
Still, the setback delayed the purchase by two months and means Valenza now has to split the store's profits.
Paul Andreotti, an executive vice president at National City Bank in Chicago, said SBA loans exist so such situations are avoided.
Without the 7(a) loans, many business owners would have to finance growth on their credit cards or through other expensive means.
"If the SBA wasn't guaranteeing loans, banks couldn't be as aggressive and provide as much capital," said Andreotti, whose bank is putting together a 7(a) loan so Valenza can open a third Jimmy John's location in Oak Lawn, Ill. While he's not happy to see the fees climbing, Andreotti said, "In the long run I think it will positively impact small businesses."
Fees for the 7(a) program are now 2 percent on loans up to $150,000, up from 1 percent. Loans between $150,001 and $700,000 carry a 3 percent fee, up from 2.5 percent. Loans for more than $700,000 still carry a 3.5 percent fee.
The loan applicant usually pays these fees. Banks have to pay another fee, which has also increased recently.
The SBA guarantees 85 percent of 7(a) loans up to $150,000 and 75 percent of loans for more than $150,000.
Previously, the highest loan guarantee was $1 million, but under the new legislation that figure was raised to $1.5 million. This means the program will now guarantee 75 percent of a $2 million loan, the largest 7(a) loan available.
Still, not everyone in the SBA universe is sold that the compromise was the best solution.
"Clearly there were members of Congress that felt this program was worthy of receiving an appropriation," said James Ballentine, director of community and economic development at the American Bankers Association.
Ballentine said some business owners as well as lenders may be dissuaded from taking part in the program because of the fees.
Early indications, though, are that participation in the 7(a) program is at record levels.
From Oct. 1, the beginning of the fiscal year, through Dec. 10, the program has done more than 18,000 loans that are worth nearly $2.8 billion. During the same period in 2003, the program did fewer than 15,000 loans, worth $2.4 billion.
In the past fiscal year, the 7(a) program did nearly 75,000 loans, worth $12.6 billion. The program has $16 billion in loans available for the current fiscal year.
"We think that should be sufficient," said Jodi Polonet, senior vice president of Business Loan Express LLC in New York. "We are satisfied."
