On page 1,197 of President Obama’s budget proposal for next year, there are two dashed lines. To most, the notations would seem rather inconspicuous. But for the Small Business Administration, they’re a pretty big deal.
Signifying zeroes, the lines indicate that the White House has requested not one penny to cover the cost of the SBA’s two signature small-business lending programs, which only five years ago were bleeding the government of more than a half billion dollars annually. It’s the first time since before the recession that the administration expects the fees it collects from borrowers to offset the costs from businesses that default; in other words, the programs will be self-sufficient with no help from taxpayers.
“We are proud of this achievement and the fiscal responsibility it represents,” SBA Administrator Maria Contreras-Sweet said during a hearing last week.
It’s an important accomplishment for the agency, not only because of the savings it represents for taxpayers, and not merely because it suggests a healthier financial climate on Main Street. It’s also key because the agency has come under fire lately for what some lawmakers have described as unnecessary spending on programs that haven’t been approved by Congress. For instance, the agency has asked for several million dollars next year to spend on new lending tools and entrepreneurship training courses – both of which have drawn criticism from members of the House and Senate.
Moving the loan programs back into the black – or at least back to break even – could give SBA officials much-needed leverage as they try to persuade their overseers on Capitol Hill to give them a little leeway to experiment.
During the hearing last week, the focus of which was the agency’s budget request for 2016, Contreras-Sweet lauded the accomplishment as evidence of her “commitment to be a good steward of taxpayer dollars.”
Under the lending efforts, called the 7(a) and 504 programs, the agency doesn’t actually make loans; rather, it provides guarantees to banks and credit unions, promising to cover a certain portion of their losses in the event a borrower defaults. In essence, the programs are meant to encourage banks to consider loans they might otherwise turn down.
Small businesses can apply for loans of up to $5 million under both programs. Under the more popular one, the 7(a) program, companies can use the money to cover an array of general business expenses, including working capital to purchase inventory or supplies. Conversely, 504 loan proceeds are reserved for buying major assets such as land, buildings or large equipment.
Once self-sufficient, the programs became increasingly costly during the economic collapse, as businesses around the country watched their revenues dry up and struggled to stay on top of their debt. Combined, the 7(a) and 504 programs required a subsidy of $299 million in 2009. In 2010 and 2011, the total costs ballooned to $587 million and $562 million, respectively.
The amounting losses didn’t sit well with members of Congress. During a hearing about the SBA’s budget in March 2012, Rep. Sam Graves (R-Mo.), then chairman of the small business committee, pointed out that the soaring cost of the loan programs consistently represented “the largest increase in SBA’s budget” requests to Congress.
“A key component in determining the amount needed is how much the government can expect to recover if the loan defaults,” he added. “The SBA has provided no path to improve such recoveries or plans for revamping the computer programs that manage these loans.”
Somewhere along the way, that changed. SBA officials responded in recent years by raising fees on some larger loans, enhancing oversight of the loan portfolios, and tweaking the loan application review processes – including taking into account new and evidently more telling risk factors.
At the same time, the recent economic recovery has put more small businesses back in good financial health.
“As the market is improving, more small businesses are able to repay their loans consistent with the terms of the agreement, so losses are declining,” Contreras-Sweet wrote in an e-mail to On Small Business.
How long the programs can remain sustainable is unclear, though. In her e-mail, Contreras-Sweet said that “while we hope this continues,” the agency cannot promise the programs won’t need taxpayer support again in the future.
“It is difficult to make predictions since subsidy rates are affected by market conditions and the strength of the economy,” she wrote.