Good Times, Bad Times

The Small Business Administration kicked off National Small Business Week today, but the celebration could end on a sour note: The agency is about to run out of money for the breaks that revitalized its lending programs.

SBA loans are a popular source of long-term loans for small businesses, but they fell sharply along with other types of business loans when the credit crisis hit in the fall of 2008. The economic-stimulus bill, which passed in February 2009, increased the government guarantee on the SBA’s flagship 7(a) loans to 90 percent (up from the typical 75 percent) and reduced fees on 7(a) loans and the SBA’s 504 loans, which primarily are used for real estate.

These enhancements made SBA loans less risky for lenders and more affordable for borrowers. As a result, SBA lending rebounded. Through May 14, more than $9 billion in 7(a) loans were made this fiscal year, which began October 1. That’s nearly twice as much money as was loaned through the program during the same period a year earlier. Nearly $3 billion in 504 loans had been made, up nearly $1 billion from a year earlier.

This growth in SBA lending is noteworthy given the constricted market for small-business lending overall. The problem is the higher loan guarantee and reduced fees will disappear, at least temporarily, by the end of the week unless Congress gets its act together. Congress has been extending these breaks on a month-by-month basis ever since the original funding ran out. The latest authorization expires on Memorial Day.

The Obama administration asked Congress months ago to extend these SBA loan enhancements until the end of the year, but it has failed to do so. The House will consider legislation this week that includes this provision, but it is only a tiny part of a nearly $200 billion bill that also includes extensions of various tax breaks and unemployment benefits and also slaps on some tax increases to pay for part of its cost. Even if the bill passes the House this week, it’s highly unlikely the Senate will follow suit in time to keep the SBA loan breaks in place.

That means we could see a repeat of what has happened a couple of times before with SBA loans: The higher guarantee and reduced fees will go away for a while, and banks will put loans on a waiting list hoping Congress will restore the breaks (as it did in the past). This means startups and expansions that would be funded by these loans will be delayed. It would be much better for the economy, small businesses, and the SBA’s credibility if Congress would do a longer extension of the loan breaks and say that’s it, instead of playing “now you see it, now you don’t.”

Unfortunately, simple things don’t come easily in Congress.

Instead of passing stand-alone SBA bills, Congress likes to tack them on to other legislation so it can claim these bigger bills help small businesses.

The Obama administration also has asked Congress to increase the size limits on SBA loans, so they can be used by more manufacturers and franchises. It also wants to allow small businesses to refinance their commercial real estate mortgages with 504 loans in order to address the problems in that credit market. These relatively noncontroversial proposals have failed to make it through Congress, however.

Now the word is these SBA proposals may be tacked on to a much more controversial bill: providing $30 billion in government money to community banks so they can make more small-business loans. Republicans have dubbed this proposal “TARP Jr.”—another bank bailout. The odds of it being enacted are slim.

Once again, inexpensive and effective enhancements to SBA programs probably won’t happen because they’re being used as sweeteners for expensive and maybe ineffective legislation.