Impending 7(a) Program Shutdown

July 22, 2015

pic-moneyThe U.S. Small Business Administration’s (SBA) flagship lending program could go on hold later this month if the agency reaches the statutory limit on the amount of loans it can back.

Because of high lending levels, the SBA’s 7(a) loan program will reach its statutory $18.75 billion limit in guaranteed loans by the end of July or early August, two months before the government’s fiscal year ends Sept. 30. While the program is funded by user fees, Congress would have to approve any increase in the lending authority available for the program. However, lawmakers will be going on recess in August, and unless they raise the limit before they leave, the SBA won’t be able to guarantee new loans.

SBA Administrator Maria Contreras-Sweet last month asked Congress to raise the limit to $22.5 billion. In letters to several lawmakers, Contreras-Sweet warned that without an increase, 7(a) loans would be suspended until the beginning of the new fiscal year on Oct. 1. Through the first three quarters of the fiscal year, the SBA had used up 75 percent of its guarantee money, and the fourth quarter is the 7(a) program’s busiest time of the year.

Late on July 21, House Small Business Committee Ranking Member Nydia Velazquez (D-N.Y.), along with all Democratic Members of the Committee, introduced a bill  (H.R. 3132) which would raise the cap to 23.5 billion, giving the agency–and Congress–a bit of wiggle room before they must pass new authorizing language at the start of FY 2016.

The 7(a) program is the SBA’s largest, with loans that can be used to buy or operate a business, purchase or improve equipment or property or refinance most types of business debt. The maximum loan amount is $5 million.

Lending in the 7(a) program has been increasing exponentially due to a variety of factors. The current climate surrounding the private sector’s financial institutions and the evolving status of small-business needs are the main drivers of increased need for 7(a) loans. Over the past few years, companies have also grown healthier and more willing to take on debt to expand, while technology has made SBA lending more efficient.

Companies apply to banks and other lenders for SBA loans; the banks then seek guarantees from the agency. Higher capital requirements have pushed these banks toward the SBA guarantee where they fund only the unguaranteed loan portions. Furthermore, secondary markets for small-business loans have increased, which makes SBA loans less costly for banks and more desirable.

Further delays to raising the 7(a) lending limit risk removing a vital, low-cost lifeline upon which small businesses depend to finance expansion and hiring, so it is vital that Congressional action on this matter takes place before the recess.