Demand Exceeded Program Funding

By John Schmeltzer and Rob Kaiser

The U.S. Small Business Administration has temporarily suspended its flagship loan guarantee program just three months into the fiscal year, citing insufficient funding to meet unprecedented demand for loans.

The agency said that thousands of unprocessed loan applications will be returned to lenders, while applications already sent to processing centers will be canceled.

It is believed to be the first-ever suspension of the SBA's 7(a) loan program, which backs 40 percent of all long-term lending to the country's small businesses.

The decision to cancel those applications will force small-business owners to re-file their applications for consideration under a new $750,000 loan limit instead of the old $2 million limit. The lower loan cap was slated to go into effect Thursday, according to the SBA.

The change in limits has led something akin to a Depression-era run on banks in the last two weeks by those who feared the caps signaled funding problems at the agency and by those hoping to secure loans larger than $750,000 before the deadline.

Applicants sought backing on $41 million in loans in September, rising to $47 million in October, $51 million in November and $56 million in December. In January, applications skyrocketed.

"It hit $115 million on Jan. 2," said Sue Hensley, SBA spokeswoman, explaining the decision to impose the cap and suspend the program.

Hensley blamed the temporary shutdown of the program on Congress' inability to agree on the 2004 federal budget, which began in October. Under the continuing resolution that provides funding until a budget is passed, departments and agencies receive only 90 percent of their monthly budget request.

The lending program could resume quickly if Congress and the Office of Management and Budget allow the agency to back an additional $470 million in January loans, she said.

The decision to impose the cap could be a blow to President Bush, who repeatedly has said that the nation's small businesses would help lead the nation's recovery from the economic downturn.

With encouragement from the administration, the SBA has been focused on increasing the number of loans it gives out each year. Through Jan. 2, the SBA had approved 37 percent more loans than it had during the same period a year earlier. The total dollar value of the loans rose about 40 percent.

While called a loan program, the 7(a) program actually is a loan guarantee program. This year SBA budgeted enough funds to guarantee $9.3 billion in loans.

The action to suspend the program and impose the cap was swiftly denounced by the American Bankers Association. The industry group charged that the SBA had mismanaged the program by underestimating loan demand.

House Democrats, meanwhile, claimed the suspension would be "detrimental to the growth of this nation's small businesses."

'Panic' over lower cap

U.S. Rep. Nydia Velazquez, (D-N.Y.), ranking Democrat on the House Small Business Committee, charged that the notice to impose the $750,000 cap on loans issued by the SBA "created a panic, causing a 1930s-style run on the banks."

James Ballentine, the ABA's director of housing and community development, said the SBA miscalculated the demand for loans and didn't request enough money for the 2004 budget.

"If they had sought the $12 billion that everyone told them to seek [last year], the program would be running normally," he said.

Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders, agreed with the ABA.

"The administration ignored the lending patterns that occurred at the end of last year," said Wilkinson, whose group represents banks and other lenders.

He said the SBA had been guaranteeing close to $1 billion in 7(a) loans per month last year, meaning it should have assumed demand for at least $12 billion in the current fiscal year, which started in October. .

Bankers and small-business officials said 7(a) loans are critical to many start-up and growing companies since they are targeted for firms to which banks would not normally lend.

Loan guarantees ease process

With the SBA providing loan guarantees, banks are more willing to extend credit to companies that want to buy more equipment, hire new employees or bid on a big contract.

"It's absolutely critical," Hedy Ratner, co-president of the Women's Business Development Center, said of the program. "Our businesses would be lost without it."

Several bank officials said that while the SBA has previously installed caps on loan sizes, the agency's action this week is unprecedented.

"I do not ever remember them cutting off the entire program," said Judy Delbovo, a vice president at Harris Bank.