Even though small business is the engine that continues to drive our economy, the Bush Administration has chosen to reduce the SBA budget for five consecutive years. The SBA has the dubious honor of being one of a handful of agencies to have its funding reduced every year. In the instance of the 7(a) program, the SBA’s flagship lending vehicle which annually has delivered $12 billion or more into the economy, this Administration has chosen to provide zero funding, despite the fact that the “cost” of this program represents less than 0.03 percent of the federal budget. Last year was the first time in the agency’s 52-year history where this program received no budget allocation. So, how has this lack of funding impacted the SBA loan program?

The good news is: the SBA program for FY 2006 has $18 billion available in loans that can be guaranteed by the SBA. At that level, all eligible small business loan demand will be satisfied. The bad news is: the loan fees paid on SBA loans of $150,000 or less were increased by 100 percent, while the loan fees of loans greater than $1.0 million were increased by 7 percent, with all other loan fees unchanged. At the same time, the ongoing fees paid by lenders participating in the program, which are normally passed through to the borrowers, have been increased by 118 percent. The other significant change has been the increasing of the maximum SBA guaranty to $1.5 million.

How has this impacted the market? At one time, most SBA lenders would fund all SBA loans from $50,000 to over $1 million. This is not the case today, with only a few lenders offering all the SBA products. On one end of the spectrum you have major banks and credit card companies limiting themselves to smaller SBA loans ($25,000 to $150,0000). These loans often have higher interest rates than traditional SBA loans. On the other end, you have out-of-state and non-bank lenders who limit their market to loans of greater than $250,000, primarily involving commercial real estate. Their average loan size often is $500-$1,000,000. These two segments now fund over 90 percent of the SBA-guaranteed loans. The other 10 percent is provided by SBA lenders who still offer the full spectrum of SBA loans, ranging from the $10,000 lines of credit to $1 million real estate loans.

Given the added expense associated with these loans, is this product a viable alternative to conventional commercial financing? The answer is definitely yes! Even with the higher fees and interest rates, SBA loans remain the only reasonable source of capital for new businesses. This is often the case when an individual is purchasing an existing business, too. The SBA also provides the best, and sometimes the only, product available for businesses, which can afford the monthly mortgage payments associated with a commercial real estate purchase, but cannot afford the down payment. Furthermore, by employing these loans, borrowers often can avoid balloon payments. Another advantage of SBA loans is terming. Whereas most commercial term loans are 3 to 5 years in duration, either fully amortizing or with a balloon payment, SBA loans normally are fully amortized over 7 to 10 years, with no penalties or balloon payments. As such, the payments on these loans are more manageable. As a result of all of these opportunities, the SBA loan program continues to deliver “value-added loans.”

The question remains, will the SBA be able to continue its service of small business if the Bush Administration continues to reduce its budget? During the past 25 years the agency has had its work force reduced by 50 percent while increasing the dollar amount of funds injected into the economy by over 500 percent. At what point will the lack of budgetary support make it impossible for the SBA to properly serve its customers – America’s Small Businesses?

(Editor’s Note: Scott Harvey is a Vice President with Kitsap Bank. He is in charge of the bank’s SBA program and is a national award-winning SBA lender. Reach him at 360-876-3629 or sharvey@kitsapbank.com.).