Feeling the pinch: a new proposal seeks to get the SBA's 7 loan program back on its feet. But what could it mean for you?

Entrepreneur, May, 2004 by Stephen Barlas

WHEN THE SBA'S 7(a) PROGRAM RAN OUT OF FUNDS IN JANuary because Congress failed to pass an appropriation for fiscal 2004, the SBA instituted emergency procedures, including lowering the 7(a) loan ceiling from $2 million to $750,000. (In fiscal 2003, 95 percent of 7(a) loans were for less than $750,000.) That cap remained in place even after Congress passed the omnibus 2004 appropriations bill in late January.

Bush's 2005 budget proposal, which was released in February, included a proposal the SBA says would put the 7(a) program on more solid footing. The key component of that proposal, sponsored by Rep. Don Manzuno (R-IL), chair of the House Small Business Committee, reduces the 7(a) guarantee level from between 75 and 85 percent to 50 percent--the same level as in the SBA Express loan program, a subcategory within 7(a). Express loans have been limited to $250,000; neatly 50 percent of 7(a) loans are Express loans already. The Manzuno bill would increase that figure to 100 percent and raise the Express cap to $2 million.

But several key members of Congress think the lower guarantee rate shifts too much risk onto lenders and small businesses. Says Rep. Nydia Velazquez (D-NY), top Democrat on the House Small Business Committee, "SBA Express is an alternative lending tool, but it is by no means a replacement for the 7(a) program." Sen. Olympia Snowe (R-ME), chair of the Senate Committee on Small Business & Entrepreneurship, also questioned the proposal.

SBA officials contend the lower guarantee rate will allow the SBA to expand 7(a) loans from the $9.5 billion available in fiscal 2004 to $12.5 billion in fiscal 2005, while reducing the expenditure of federal funds.

STEPHEN BARLAS is a freelance business reporter who covers the Washington Beat for 15 magazines.