SBA’s Shortfall Deals Big Setback to Small Business

WASHINGTON — Small businesses already reeling from the credit crunch suffered a big setback on Tuesday as the Small Business Administration’s key loan program ran out of money and may not get any more for five months.

SBA’s funding shortfall could mean that thousands of financially strapped entrepreneurs--including many in the Los Angeles area whose businesses were damaged in last year’s riots--won’t be able to get government-guaranteed loans until Oct. 1, the beginning of the new federal fiscal year. SBA-backed financing has been virtually the only source of long-term financing for many small businesses in recent years.

But not all the news was bad for small business. The Securities and Exchange Commission on Tuesday decided to make it easier for small firms to raise money in the stock market. The SEC decision to ease the regulatory burden on public stock offerings of less than $10 million will make it less costly for small companies to issue stock.

Both developments underscored the difficulties small businesses face in raising capital amid a nationwide credit crunch brought on in part by stricter banking regulations. The lending environment could grow even more chilly next month when new accounting rules are expected to be adopted that will force banks and thrifts to set aside more money for projected losses on bad loans, limiting further their ability to finance small- and medium-sized businesses.

The credit crunch has already touched off an avalanche of guaranteed-loan requests at the SBA that has depleted the agency’s underwriting capacity. Demand for SBA-backed loans reached a record $5.6 billion during the 1992 fiscal year, an increase of more than 35% over fiscal 1991. About 22,400 entrepreneurs sought SBA loan guarantees, each of which costs taxpayers about a nickel per dollar of loan amount.

However, last week Congress declined to approve President Clinton’s economic stimulus package, which contained $141 million in funding that would have provided about $2.5 billion in new small business loans.

Congress, small business groups and Administration officials are trying to hammer out a proposal to keep the program afloat. But with Republicans arguing that more SBA funding will worsen the deficit, it’s unclear whether a compromise can be reached.

“It is incomprehensible to me that our government can just turn its back on American small business,” said Anthony Wilkinson, president of the National Assn. of Government Guaranteed Lenders, a nonprofit group of banks and other institutions active in SBA lending programs.

“The small business community is going to find it extremely difficult to get the capital they need to continue creating jobs and generating tax revenue,” he said.

In past years, the SBA sometimes ran out of money with a few days left in the fiscal year, but the shortfall had no noticeable effect on borrowers.

This time, said SBA spokesman Michael Stamler, the SBA will be out of the guaranteed-loan business as of 10 a.m. today.

“The average 100 borrowers a day who apply for loans will be told, ‘You just have to wait and see’ ” what action Congress takes on providing SBA with supplemental funding, Stamler said.

He added that the SBA’s Glendale and San Francisco offices were the agency’s two busiest and that any prolonged suspension of SBA lending activity “would have the greatest impact there in California.”

A congressional contingent led by House Speaker Thomas S. Foley (D-Wash.) and Majority Leader Richard A. Gephardt (D-Mo.) was scheduled on Tuesday to make an eleventh-hour appeal to President Clinton to press Congress on the issue.

But there was no word from the White House late Tuesday on the outcome of the meeting.

The news was more upbeat for small companies hoping to raise money in the stock market.

The new SEC rules would expand pre-existing regulations aimed at saving small companies time and expense by letting them test whether their securities would be attractive to investors before filing formal documents for an offering.

Normally, companies offering stock must issue a detailed legal document called a prospectus that outlines the potential financial risk and benefits for investors.

Under the new rules, small companies could use a simpler question and answer format to test the waters for a public offering and would be permitted to sell up to $1 million of securities each year without having to register with the SEC or state regulators.

Some critics have attacked the easing of SEC filing rules, saying they will lead to financial abuses. But SEC commissioners say the new rules are needed.

“This is another step we’re taking toward easing the regulatory burdens on small business,” said SEC Commissioner J. Carter Beese Jr. He said since the SEC began easing filing requirements for small companies last summer, the number of public offerings by such businesses has risen fourfold.

In addition, the rules simplified the number and kind of financial forms small companies must file with the SEC and made it cheaper for such companies to come to market by eliminating some requirements that generated extra legal and accounting fees.

The SEC also voted to ease the transition of small companies into the more stringent set of filings required of larger companies.