New Limit on SBA-Backed Loans Drawing Fire

The Small Business Administration’s decision to place a $500,000 ceiling on loans made under its popular loan-guarantee program Tuesday drew a disappointed reaction from the small business community, which increasingly has been turning to the federal agency for financing help.

“The ripple effect is significant,” said Patty DeDominic, president of the National Assn. of Women Business Owners and chief executive of Los Angeles-based PDQ Personnel Services. She said such a limit would dissuade banks from working with small and expanding businesses.

“Since small business is the fastest-growing segment of our economy and provides the majority of our employment, cutting back SBA’s support is killing the goose that lays the golden egg,” DeDominic said.

The change, starting Jan. 1, could affect thousands of small companies looking for financing. For the fiscal year ended Sept. 30, 11% of the loan guarantees were for transactions of $500,000 or more, SBA spokesman Mike Stamler said. Those loans accounted for 38% of the $8.2 billion in loan guarantees issued during the fiscal year.

The SBA makes relatively few direct loans, but instead uses most of its funds to guarantee a portion of loans made by banks and other lenders. Currently, loans of any size are eligible for SBA backing.

Without the ceiling, the SBA would probably run through the $7.8 billion allocated for its 7(a) loan-guarantee program by next July, Stamler said. Demand for funds is running at a historic high of $38 million a day on average. The program ran out of money for a time in fiscal 1993.

SBA Administrator Philip Lader said in a statement that the change “will allow the agency to serve the greatest number of small businesses possible.”

John Paul Galles, president of the Small Business United lobby, called the change “disappointing” but necessary.

“I would rather they expand the ceiling and expand the number of loans they guarantee, but we have limited federal resources,” Galles said. “People are going to have to wake up to the reality that when they call for cuts, it’s these types of programs that are going to be cut.

“It’s tremendously unfortunate, because banks are not meeting the needs of the small business,” he said.

Stamler said the loan cap is part of an overhauling of the guarantee program that also streamlined the documentation process for smaller loans. That program has become so popular that more than half the guarantees issued since it was introduced last July have been for loans of under $100,000.