The Small Business Administration freed up $1.4 billion in additional loan authority for its popular 7(a) business loans by applying a lower subsidy rate retroactively to a special Sept. 11-related loan program that expired in January.

The move increases the total amount of governmentguaranteed 7(a) loans available to small businesses this fiscal year to $10.8 billion. The loans are attractive to startups and early-stage businesses because they offer long terms with low monthly payments.

SBA lenders and members of Congress had been urging the SBA since February to apply its new econometric subsidy rate model to the Supplemental Terrorist Activity Relief program, which provided $1.7 billion in loans to small businesses affected by the Sept. 11, 2001 terrorist attacks on America.

Using the new subsidy rate lowered the cost of the STAR program, enabling enough money to be transferred to the regular 7(a) program to support an additional $1.4 billion in loans.

This "long overdue step" will "expand loan funds available to small business at an opportune moment" and "enable us to help restart the economy," says Sen. Olympia Snowe, R-Maine, chair of the Senate Small Business and Entrepreneurship Committee.

SBA lenders say the $9.4 billion previously available for 7(a) loans this year was not sufficient to meet demand from small busiesses.


The agency has requested $9.3 billion in 7(a) loan authority for next fiscal year, "once again ... an insufficient amount," says Sen. John Kerry of Massachusetts, the committee's ranking Democrat.

Kerry says he is pleased that SBA finally "decided to follow congressional intent" and apply the new subsidy rate to the STAR program, but he was disappointed the agency "dragged its feet" in doing so.

Until this month, agency officials had said the STAR loans could not be rescored with the new subsidy rate since that program ended before Congress passed legislation directing the SBA to use the new model. The SBA's previous model overestimated how much money was needed to cover defaults and other costs of loan programs.

SBA Administrator Hector Barreto now says the agency had to work with partners, including the Office of Management and Budget, to study the impact of rescoring the STAR loans with the new subsidy rate before it could take that action.

"We're glad to be able to make it happen," Barreto says.


The SBA continues to maintain, however, that it can meet demand for 7(a) loans even without the extra money provided by the rescoring of the STAR loans.

"We're not concerned about running out of money in 2003," Barreto says.

The agency is approving about $40 million worth of loans a day. That per-day average would have to jump to $54 million to deplete the 7(a) loan pool.

Through May 30, the agency had approved $6.8 billion in 7(a) loans this year, down from $7 billion during the same period a year earlier. But the number of loans Jumped from 30,312 to 41,617, reflecting the priority the SBA now places on smaller loans. The average loan size fell from $233,076 to $162,938.

Smaller loans create more jobs per dollar than larger loans do, Barreto says.

"By focusing on a smaller average loan size, we are assisting more small businesses and creating more jobs," he says.

Small businesses that need larger loans are being encouraged to use the 504 program, which provides financing for real estate and other fixed assets through certified development companies.