SBA budget proposals anger critics

While the head of the U.S.

Small Business Administration was visiting Reno last week in a show of support for area businesses, some who work closely with the SBA said Hector Barreto and the Bush Administration are hurting, not helping, small business.

They say that SBA Administrator Barreto has made several decisions that have reduced access to capital, including requesting too little money for the SBA budget this year and briefly closing down its most popular loan program in January without properly notifying Congress, and then cutting the maximum loan amount when the program was reopened.

Some of the changes and proposed changes for 2005, lenders say, also raise the fees and the risk for the banks that make the loans while reducing the banks' business by cutting back on loan volume.

Also, the SBA is trying to close down two programs - its microloan program and its business training called PRIME - by not requesting any funds for them in its 2005 budget proposal.

"This will absolutely kill entrepreneurship for low-income entrepreneurs," said Nancy Erends Bahr, the executive director of the Nevada Microenterprise Initiative in Reno.

"If there's no microloan program their options are gone." "Why the SBA continually gets underfunded in this administration is a quandary," she said.

SBA Administrator Barreto spoke on Tuesday at a Reno luncheon celebrating the agency's 50th anniversary and as part of the agency's multi-city tour called "SBA's Economic Growth Tour: Listening to America's Job Creators." By Wednesday he was back in Washington testifying before House and Senate committees overseeing the SBA's 2005 budget request.

As part of the budget, the SBA said it is requesting $3 billion more for its 7a program - the SBA's biggest program and the one closed down briefly earlier this year - as well as immediately raising the cap on loans from $750,000 to $2 million.

But the money will be dedicated to SBA Express, a part of the program that is more costly for lenders to administer, according to Jerry Murphy, sales vice president, SBA loans, with Community National Bank in Reno.

"The personnel costs to administer some of the SBA Express loans will be prohibitive to all but the largest financial institutions," said Murphy.

"Further, the reduction of the guarantee to 50 percent will also adversely impact smaller bank's ability to make SBA Express loans as they will not have the security to protect themselves from the higher risk that SBA loans present."

Barreto is proposing cutting the guaranty rate the amount of a loan guaranteed by the government from 75 percent to 50 percent.

At the same time, he wants to raise fees on the banks and to return the guaranty fee - a fee paid by the borrower - to the pre-2001 rate of 3.5 percent.

(In response to Sept.

11, the guaranty fee was reduced and graduated, starting at 1 percent for the smallest loans and ending at 3.5 percent for loans above $700,000.)

Barreto said this will help move the program to a zero subsidy.

The program currently is estimated to cost taxpayers $1.02 per $100 loaned.

"Conceptually, the zero subsidy sounds good," said Bob Coleman, publisher of the Coleman Report, an industry newsletter covering SBA lending based in La Canada, Calif.

"But he did it with zero industry feedback." That complaint is echoed by bankers.

Tony Wilkinson, president of the National Association of Guaranteed Government Lenders, for example, testified last week before the House small business committee saying that recent changes to the 7a program were made by the SBA without consulting or informing the lenders.

And the lenders aren't the only ones criticizing the SBA.

Sen.

John Kerry (DMass.) and Sen.

Olympia Snowe (RMaine), who chairs the Senate's Committee on Small Business & Entrepreneurship, took Barreto and the SBA to task for closing down the 7a program.

"You could have exercised your authority to reprogram money instead of abruptly shutting down small business lending," said Kerry in a release in response to the halt in 7a lending.

Barreto says that's not true.

"Different appropriations can't be put into another program," he said during an interview prior to last week's Reno luncheon.

Barreto says the largest 7a loans were eating up all of the program's resources.

"That is one of the reasons we had to close down the program for a few days," he said.

The SBA then had a run on loan applications, says Barreto, when it announced it would be placing a cap on loans.

"We ran out of money, and it's against the law to make these loans without the money." Barreto, and others, say it's the banks that are most upset by the temporary shut down of the program.

But borrowers were affected, too.

Nirmal Nagra, for example, the former owner of the Stagecoach Market in Stagecoach, was working with Community Bank at the end of last year to secure a $2.1 million 7a loan to purchase a Super 8 Motel in Phoenix.

He had a lease option agreement to purchase the motel that was set to expire if he didn't obtain financing by early January.

If the option expired, said Nagra, he would have lost his deposit of $300,000 plus about $100,000 in improvements he had already made to the property.

So the bank worked out a second loan to make up the shortfall, which cost Nara an additional $70,000 in fees and interest.

"While paying out these additional monies to keep my motel purchase alive is better than losing the $400,000 ...

this is still a very upsetting turn of events," said Nagra.

The area's smallest businesses, though, may be hardest hit by some of the SBA's proposed changes.

The NMI, for example, will lose 30 percent of its operating budget if the microloan program is shut down, said Bahr.

That money is used primarily for the salaries of staff that provide a lot of training to new entrepreneurs.

NMI, for example, helps people develop business plans and provides training on such issues as cash flow.

"We take the time that bankers no longer have," said Bahr.

The SBA is suggesting that people that would have applied for a microloan - small loans up to $35,000 - will be able to apply for small 7a loans.

But Bahr says that is unrealistic since the majority of NMI's borrowers could not meet the credit requirements for a 7a loan.

"The hardest thing to take in all this," said Bahr, "is that we pay our way.We create commerce and small business and jobs.

It's not a give away."