Funding Crunch Could Stifle Start-Ups, Crimp Job Creation

By Jim Hopkins

The U.S. Small Business Administration has temporarily shuttered its most popular loan guarantee program because it cannot meet an unexpected surge in demand.

The closing of the 7(a) loan program pinches a key source of financing for many of the USA's 5.6 million small companies just as the economy is recovering, small-business advocates warned Wednesday.

The agency blamed Congress' failure to approve its fiscal 2004 budget, which began Oct. 1. That budget called for $ 9.4 billion for the loan program.

But small-business advocates and bankers said the agency underestimated demand.

"As the economy struggles to create jobs, now is not the time to cut off small businesses from access to capital," said Rep. Nydia Velzquez of New York, the ranking Democrat on the House Small Business Committee.

Bank of America, one of the biggest SBA lenders, said it was concerned the abrupt shutdown would erode confidence in the program.

The SBA guaranteed 67,306 loans totaling $ 11.3 billion in the fiscal year that ended in September, says the National Association of Government Guaranteed Lenders, a trade group.

It estimated the SBA's shutdown would force the agency to reject about 1,000 pending applications for more than $ 600 million.

Many small companies that rely on the SBA program are start-ups, which create the most jobs during recoveries, small-business experts say. Overall, small companies employ nearly half of all workers.

But those companies often cannot get conventional bank business loans because they have not operated long enough to establish creditworthiness.

To entice banks to make such loans, the SBA guarantees up to 85% of the loan amount in the event of default. The SBA does not lend the money itself. But it must set aside money to cover unpaid loans.

The SBA hopes to get a short-term infusion of $ 470 million from Congress, which would let the agency resume lending at least through the end of this month, SBA spokeswoman Sue Hensley said.

That would be only a temporary solution, she said, while the SBA waits for approval of its overall budget. "We need a budget passed as soon as possible," she said.

The SBA first noticed it was having a problem meeting demand last fall, Hensley says. That was when the average daily value of loan applications in October rose to $ 47 million from $ 41 million in September. The average rose again in November to $ 51 million. "With the economic recovery, I think there's been an increase in small businesses seeking financing," Hensley says.

Before shutting down the program, the SBA cut the maximum loan size guaranteed to $ 750,000 from $ 2 million as a way to conserve funds. But as word of the cap spread, the agency was further flooded with applications, leading to the program's shutdown.