Caught in the SBA crunch

The owner of Prime Eco Fluids Inc. in Sugar Land put down earnest money on land and a building for expansion and relocation of his business, selling additives to construction and oil companies. But Guzman's hard work was suddenly stymied on Jan. 6, when the Small Business Administration called an abrupt halt to loan approvals in the federal agency's flagship 7(a) lending program. "We were in the middle of paperwork and ready to roll when the bank told me I couldn't get that money," says Guzman, who had planned to add seven new employees. "Suddenly, my whole business went dead because I was counting on that money." While in the process of evaluating his options, Guzman got some good news when the suspension proved to be short-lived and the SBA resumed 7(a) lending activity on Jan. 14. But Guzman and others left in lending limbo can't count on getting their money yet. Resumption of the 7(a) loan program last week was made possible when the SBA received congressional approval to tap $470 million carried over from the past fiscal year. While local SBA lenders welcome the return to business afforded by the fresh infusion of funds, they also warn that the amount is insufficient to provide more than a stopgap solution to a problem that requires long-term attention. Guzman is taking quick action to be one of the fortunate borrowers to secure a 7(a) loan in case the window of opportunity closes again. "It's very encouraging that the program is back up and running," says Guzman. "I'm moving ahead as quick as lightning and meeting with the SBA as soon as possible, because I know they're going to be real busy." A demanding halt The SBA called the temporary halt to 7(a) loan approvals because demand was exceeding the amount of money available to support the government-guaranteed loans. The suspension followed an earlier announcement of the SBA's plans to reduce the maximum size of 7(a) loans from $2 million to $750,000, effective Jan. 8. Despite this demand, the SBA could have considerably less money for 7(a) loans this year. The appropriations bill now under review in Congress calls for less than $9.6 billion in 7(a) loan funding, compared with $11.3 billion in fiscal 2003. Until Congress approves the SBA's appropriations bill, the agency is operating under a resolution that limits the 7(a) program to $3.3 billion in loans through the end of January. Due to record demand for the loans, the agency had used all of that authority by Jan. 6. The sudden suspension surprised local business lenders. After several days of inactivity and uncertainty, they are scrambling to help business owners get applications processed now that the 7(a) program has been revived. Larry Conley, senior vice president and SBA loan manager for JP Morgan Chase, says the bank had about 20 small business owners across the country caught in the lending crunch. "It's excellent that the program has been reinstated, but it's definitely a short-term temporary solution," says Conley. "We still need to solve this for the long term in order to avoid another work stoppage and keep the momentum of the program going." He expects a slowdown in the turnaround time for applications due to effects of the suspension and the rush by applicants to get something accomplished in a hurry. John Runge, senior vice president and manager of SBA lending at Southwest Bank of Texas, says he's going to "hustle pretty hard" to get three pending applications in and acted upon as soon as possible. "We'll be able to help applicants now, but we're still faced with issues with the volume of loans," says Runge. "A lot of lobbying is going to need to be done to get the kind of money we need." Runge says he's concerned the SBA funding may fall short toward the end of the year.

Since the appropriations bill pending in Congress calls for less than $9.6 billion in 7(a) loans, the SBA may face another shortfall later this year. If that happens, the SBA will work with Congress to shift money from elsewhere in the agency to meet loan demand, says SBA spokeswoman Sue Hensley. The fate of the $750,000 loan cap also remains uncertain. Hensley says the agency will revisit the issue once the appropriations bill is passed, and determine whether the cap can be lifted. Runge says he'd like to see the $750,000 loan cap removed. "It's better than nothing at all, but we're going to strive to get the program in full effect again," says Runge. Tony Wilkinson, president of the National Association of Government Guaranteed Lenders, says the SBA appears intent on limiting demand for loans. For example, the agency now will not allow 7(a) loans to be "piggybacked" with conventional loans -- "another policy change and where no notice has been provided to Congress at all," Wilkinson says. The agency also created a work backlog by returning loan applications that came in before the suspension was announced, instead of holding them and processing them in the order they were received once the program resumed. "They will get hit with a flood of loan applications," Wilkinson says. awollam@bizjournals.com • 713-960-5936 Kent Hoover of the Washington bureau contributed to this story.