Government Loan Programs Face Cuts

Warren Buffett, chairman and chief executive of Berkshire Hathaway and one of the nation's most successful investors, recently pronounced that "by any commonsense definition, we are in a recession." If he's right, then small businesses will play an instrumental role in leading the economy out of the downturn.

SMBs create the lion's share of new jobs and rising employment has historically been the principal engine of economic recoveries. But their ability to create jobs will hinge, in large part, upon their access to capital. Given the current economic climate, you would think the government would be doing all it can to bolster Small Business Administration (SBA) loan programs. But the Bush administration is proceeding as if it was business as usual.

The administration, in fact, is once again proposing substantial SBA budget cuts, as it has every year since the president took office. Excluding new funding for disaster loans, the SBA budget would be slashed by 5.5 percent (adjusted for inflation) over FY 2008's appropriation. The amount may seem small, but the latest round of cuts would amount to a 41 percent reduction since 2001, according to a budget analysis prepared by Sen. John Kerry, D-Mass., who chairs the Senate Small Business Committee.

"The president's budget request shows no recognition of the country's economic woes and the positive effect that the small business community (which in the past 15 years has created 93.5 percent of all net new jobs) could have on our troubled economy," Kerry wrote in a letter to a Sen. Kent Conrad, D-N.Dak., and Sen. Judd Gregg, R-N.H., the chairman and ranking member, respectively, of the Senate Budget Committee.

The letter was submitted as part of a recent hearing before the House Small Business Subcommittee on Finance and Tax. The subcommittee was examining ways to improve the SBA's capital programs in the face of the economic downturn. As usual, the hearing produced substantially different views of SBA programs.

Eric Zarnikow, the SBA's Associate Administrator for Capital Access, told the committee the SBA is reaching more small businesses through its business loan programs while minimizing the cost to taxpayers. In FY 2001, the loan programs served about 42,000 small business borrowers. In FY 2007, the SBA provided funding to 89,400 small business borrowers in its flagship 7(a) and 504 loan programs, he said.

Beside the 7(a) and 504 program, the SBA's other capital initiatives include a microloan program and a debenture program operated through agency-authorized Small Business Investment Companies (SBIC). The current budget proposal requests authorizations of $17.5 billion for the 7(a) program, $7.5 billion for the 504 program, $3.0 billion for the SBIC debenture program, and $25 million for the Microloan program, he noted.

But others who testified presented a different view of the administration's proposals. Christopher L. Crawford, who testified on behalf of the National Association of Development Companies (NADCO), the umbrella organization of companies that administer the 504 program, noted that the administration was maintaining the same level of funding for the program as FY2008's budget.

"With America facing perhaps its greatest credit crisis in history, we are treading on unknown ground today," he testified. "We cannot risk shortchanging businesses that need capital by allowing 504 to come even close to running out of loan authority for the next two years," he said. His organization is seeking at least $1 billion more to meet expected demand.

For its part, the administration is proposing to reduce some fees on the 504 loan program, but the government will still make more than $1.4 million off of borrowers by charging more than it costs the government to administer the loans, which must be used for fixed assets like buildings and machinery. Kerry maintains that the administration should be lowering costs to borrowers and making more money available to ease the looming credit crunch.

It's not just the 504 loan program that has generated heated debate. The administration has cut all loan capital in the SBA's microloan program and raised the interest it charges on loans to make the program self-financing. In addition, the administration is proposing to cut all funding for microloan technical assistance.

"This proposal will make this program unworkable," said Daniel Betancourt, president and chief executive of Community First Fund in Lancaster, Pa., which serves as a microloan intermediary. "The reason that the Microloan Program has been very successful over the years has been this pairing of technical assistance funds with loan capital. This combination has led to a loan default rate of less than 1 percent, the lowest of any SBA lending program." The administration proposes shifting technical assistance to such SBA groups as SCORE and Women's Business Centers, but their budgets are being cut or kept the same, too.

The SBA's flagship 7(a) loan program is embroiled in the debate. For the sixth straight year, the administration has proposed zero funding for the program and is proposing an increase in fees by five basis points (from .49 to .54 percent). "This is the wrong time to be raising fees," Kerry noted in his letter. Loan origination has fallen by 14 percent and dollar volume has fallen by 6 percent at a time during tight credit periods when 7(a) participation has historically gone up, he added.

The SBA's Zarnikow said effectively managing resources devoted to SBA's lending activity is another of the administration's key priorities and that includes making sure programs don't cost taxpayers money. The agency has also noticed the decline in loan approvals and is working with lenders and small businesses to make sure needs are being met, he added. Even in a normal economy, the administration's SBA budget cuts would be questionable. But in the current economic climate, they are pennywise and pound foolish.

When an investor with the financial acumen of a Warren Buffet sees a recession, you can bet that we are likely in one, or close to one. The government's goal should be to make sure its depth and duration are as short as possible. But the administration's business-as-usual approach toward small businesses is more likely to prolong the nation's economic misery. Instead of cutting SBA programs, it should be pouring on the resources so that small businesses have the capital to do what they do best -- create jobs.