Officials at the U.S. Small Business Administration say new legislation that increases money available through its 7(a) loan program should have a positive impact on Colorado businesses, but area bankers who are being asked to assume more risk on some of their loans aren't so sure.
The change, signed into law April 5, is an effort by the SBA to restrain spending, but also increase its lending authority for small businesses. In 2003, a record high amount of SBA 7(a) loans eventually exhausted the program's funding and forced it to shut down for a week in January 2004. When the program returned, the lending cap fell from $2 million to $750,000.
With as many or more loans expected in 2004, the SBA now can shift more money toward small businesses by slackening the government's guarantee on 7(a) Express loans from 75 percent to 50 percent -- leaving the banks with an extra 25 percent of the risk. The 7(a) Express Loan Program is the most popular with banks because it allows them to use their own forms.
According to the SBA, the change increases SBA lending authority by a projected $3 billion and restores the prior individual lending cap from $750,000 to $2 million.
SBA lenders (such as banks) aren't convinced, however. They say the increased risk for banks may end up driving some financial institutions away from SBA lending and increase the fees for the small businesses that borrow under the revised program.
In the Denver /Boulder metro area, local banks are approaching the change with skepticism.
"I think reducing the guarantee will toss a lot of deals out of the box," said Roger Ayan, vice president of American National Bank. The Denver-based bank operates one branch in Boulder and 32 branches across the region.
Ayan said he agrees that the SBA should raise its lending authority and caps, but not at the expense of banks. Ayan said his bank soon would meet with SBA officials to discuss the changes.
From the viewpoint of SBA officials, the changes are needed to increase lending authority at a time when the number of SBA 7(a) loans hit a 50-year high in 2003.
According to SBA statistics, the SBA helped approved 67,300 7(a) loans in 2003, worth $11.3 billion -- a 30 percent increase from 2002. The 7(a) loans in 2003 accounted for about 90 percent of the total 74,169 SBA loans, and 67 percent of the total dollar amount of loans worth $16.93 billion.
In Colorado, the SBA also set records with 1,476 7(a) loans statewide, valued at $411.7 million.
"I think a great deal of the record numbers are due to the economy getting better," said SBA spokesman Doug Heye. Even during the winter, when business is usually slow, Heye said his office was unusually busy.
"We're hopeful that as these investments are being made, we will also soon see an expansion in the job market," Heye said.
The 7(a) loan program serves as the SBA's primary outlet to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and buildings, leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed asset expenditures.
The changes to the 7(a) loan program are an ideological shift to move government further away from business, said Sean Avery, marketing director for CEDCO Small Business Finance Corporation in Denver.
CEDCO deals only with 504 loans (another SBA loan mostly for real estate), but Avery said what happens with 7(a) loans will affect the 504 lending business.
"It's a mixed bag from the perspective of a 504 lender," Avery said. In some cases, 504 lenders compete with 7(a) lenders for the same loan, he said. If the ability of the 7(a) lender is reduced, then that gives an advantage to the 504 lender.
On the other hand, Avery said some of the 504 lending business depends on loans that only 7(a) lenders can make. If a small business can't get a 7(a) loan, he or she may never grow the business enough to later apply for a 504 loan, Avery said.
Tom Burke, president of SBA lending at Wells Fargo, said if the SBA wants to shift more of the risk toward banks, then it should also provide a better ability for the banks to cover the risk.
"Really what the SBA is saying is that it wants the program to become more market driven," Burke said. "If that's the case, then it should give banks more flexibility with the interest rates on the loans."
The increased flexibility in interest rates on a 7(a) loan would allow banks to better protect themselves, Burke said. Without any flexibility, the banks may turn away many small businesses because of the higher credit risk associated with covering any loss on 50 percent of the loan.
Besides 7(a) and 504 loans, the U.S. Small Business Administration also supports a MicroLoan program, providing smaller loans (up to $35,000) to startup businesses. Under this program, the SBA makes funds available to nonprofit community based lenders, which, in turn, make loans to eligible borrowers. The average loan size for this program is about $10,500.
In 2005, the SBA wants to shut down the MicroLoan program and shift the smaller loans into the 7(a) loan program. According to SBA spokesman Doug Heye, the shift is being made to become more efficient.
"We realized that we can make those same micro loans through the 7(a) program," Heye said. "Last year, the 7(a) program made 23,000 loans under $35,000. Compare that to only 2,400 loans made through the MicroLoan program."
In Colorado, the SBA MicroLoan Program has funded more than $6 million in loans to nearly 500 businesses since 1990, creating six jobs per loan on average, according to the Colorado Enterprise Fund, a nonprofit community lender based in Denver.
"This is a drop-in-the-bucket cut (of about $50 million a year) for the government, but it would decimate many small businesses," said Eric Holloway, with the Colorado Enterprise Fund.
Holloway and others believe that by shifting the micro loans into the larger 7(a) program, the smaller loans will receive less attention and consideration.
Executive Director of the Colorado Enterprise Fund, Ceyl Prinster said the SBA MicroLoan program fills an important niche, particularly in a down economy.
"Hundreds of startup and emerging businesses are unable to secure financing from a bank. Where else can they go? They turn to us for the business capital they need, and now that funding may disappear."
Heye said there is still a lot of misinformation going around.
"They say we're doing away with the MicroLoan program, but that's not the case, we're just shifting the smaller loans -- where most of them already are -- to the 7(a) program."
But even bankers who don't directly deal with the microloans said the shift might hurt the overall small business market.
"This is where some businesses get their start," said Andrew Spaulding, an SBA loan officer at Comerica Bank in Denver. Spaulding said he refers all his smaller dollar amount loans to the microlenders because they have a better expertise in dealing with start-up small businesses.
"It's a critical starting point, and the entire SBA program won't work as well without all its parts," Spaulding said. "To have a one-size-fits-all program would not be beneficial to the process."