The U.S. Small Business Administration has temporarily closed its Section 7(a) loan program and will not approve further requests for loan guarantees at this time. SBA Administrator Hector Barreto said that SBA has encountered unprecedented demand for the loan guarantees. Unprocessed applications will be returned to lenders.
The abrupt shutdown of one of the SBA's most popular loan programs has left hundreds of small businesses in financial limbo. On Jan. 6, 2004, the SBA notified members of Congress via e-mail that the Administration was instituting the "lending holiday," effective immediately because of budgetary constraints.
U.S. lawmakers have not passed a $373 billion spending bill for the budget year that started Oct. 1 2003, which includes money for the SBA backing of the 7(a) loan program. Like most federal agencies, the SBA has been functioning under a temporary authority at 2002 spending levels.
The strong demand for small loans to purchase office equipment, computers and other general businesses items led the agency last week to place a cap the maximum loan it would guarantee through the program at $750,000, down from $2 million. Banks and other financial institutions were jolted Wednesday morning by news that the SBA indefinitely halted the entire 7(a) program.
Under the program, small businesses may obtain loans of up to $2 million from financial institutions, and the SBA will guarantee up to $1 million of the loan amount. The loan may be used for a wide range of business purposes.
Sen. John F. Kerry (D- Mass.), ranking Democrat on the Senate Committee on Small Business and Entrepreneurship, sent a letter to SBA Administrator Hector Barreto objecting to the SBA's decision to immediately suspend for the loan program.
"At a time when the country has already lost 3 million jobs, it is astonishing that this Administration would deny small businesses access to loans," Kerry said in the letter. "Small businesses are the best way for our nation to create jobs and grow our economy."
In the letter, Kerry criticized the Administration for requesting inadequate program funding levels for the program year after year.
"Instead of taking action to avoid repeating past funding problems, in testimony before this Committee, the Administration has repeatedly criticized the industry's projections as excessive and dismissed concerns about the program running out of money," Kerry wrote. "Consequently, when the higher estimates are realized, Congress has been forced to bail out the Administration each year with additional appropriations and emergency legislation."
To ensure that small businesses are able to get the loans they need, Kerry urged Administrator Barreto to exercise his discretion to transfer money from within the agency to fund this program immediately, and to do so without penalizing other programs. Kerry also urged the Administration to seek supplemental funding once Congress is in session so that the program can continue uninterrupted for the remainder of the fiscal year.
"With respect to loans that are already in the SBA processing "pipeline," and contrary to the direction issued in the Policy Notice (No. 0000-1707) that the SBA released last night, the Agency should not return or destroy any loan applications it receives," Kerry wrote. "The Agency should hold the loans and date when they are received so that the Agency can process the loans in the order received once the program is again operating and guaranteeing loans. This approach is fair and does not penalize those who have pending applications.
The American Bankers Association is also urging the SBA to restart the 7(a) loan program and return the loan cap to its original limit. James Ballentine, ABA director of housing and community development, said it's unfair to lenders and most importantly unfair to small businesses.
"First the SBA underestimated loan demand. Then it tried to make up for that underestimation by placing a cap on loan amounts to small businesses," Ballentine said. "Now it's closing down the 7(a) program."
While the 7(a) program is halted, other SBA programs are unfazed by this week's events. Small businesses may apply for a loan under the Certified Development Company Program, also known as the 504-program. These loans generally are granted to companies that plan to add jobs to local economies.
Since the SBA was founded in 1953, the agency has helped nearly 20 million small businesses get up and running. Through its management programs, minority business support, and federal contract procurement assistance, the agency has been transformed into the single largest financial backer of small businesses in the nation.
The SBA currently manages approximately 219,000 loans worth more than $45 billion. A significant portion of its loan portfolio consists of low-interest disaster relief funding for small businesses.
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