By John Schmeltzer

The Bush administration's proposed budget submitted Monday cut a 50-year-old subsidy for the U.S. Small Business Administration, reducing the agency's funding by 15 percent even as loan demand has hit record levels.

But the largest backer of long-term lending to the country's small businesses expects it will be able to guarantee 30 percent more, or a total of $12.5 billion, in loans under its main 7(a) program in fiscal 2005 through higher fees.

Bush is seeking $678.4 million for the SBA in his proposed fiscal 2005 budget, down from the $797.9 million Congress approved in fiscal 2004. A $79 million subsidy that helped defray costs of 7(a) loan applications and processing has been eliminated, and another $40 million was cut in salaries and changes to other programs.

To replace the lost funding for the 7(a) program, the agency will increase fees, which are slated to go into effect in October, when fiscal 2005 begins. A spokesman said he did not know the size of the increase.

The 7(a) program was shut down in January by the SBA after loan applications exceeded a temporary funding level set because Congress hadn't approved the federal budget. After the budget was passed in late January, the SBA restored the loan program but imposed a $750,000 cap and prohibited the piggybacking of a second loan.

Doug Heye, a spokesman for the SBA, said eliminating the subsidy ensures the program won't be shut down in a future funding crisis.

"We wanted to keep the program up and running as much as possible, and one of ways we do it is not be dependent upon a congressional appropriation," he said.

The elimination of the subsidy brought protests from House Democrats and business advocate groups, who said the administration is gutting access to the program.

"As it stands now, the program doesn't have the resources to meet demand, and the zero subsidy will create either significantly higher fees or significantly fewer loans," said Jeremy Claeys, a spokesman for the National Small Business Association. "Either way, it makes starting or expanding a small business more difficult and more expensive."

U.S. Rep. Nydia Velazquez (D-N.Y.), the ranking Democrat on the House Small Business Committee, accused President Bush of abandoning small businesses.

"Even though small businesses are the No. 1 job creator in this country--and jobs are exactly what the American people need right now--the SBA is one of the hardest hit agencies in Bush's $2.4 trillion fiscal year budget," she said. "This shows just how weak this administration's commitment is to small businesses, which are the backbone of the U.S. economy."