Historically, the SBA has relied on three principal funding sources to make good on 7(a) loans that default: loan-guaranty fees, which are assessed on lenders but are typically passed directly to borrowers; loan-servicing fees assessed on lenders, which can’t be passed directly to borrowers but are taken into account by lenders when setting interest rates on their loans; and federal subsidies. Should losses exceed the funds available from those sources, taxpayers are on the hook for the difference, beyond the federal subsidy, though an SBA spokesman says that’s never happened. In fact, he says, the default rate on 7(a) loans is only slightly higher than the default rate on comparable conventional loans. Meanwhile, the program boasts some notable success stories: Callaway Golf Co., Intel Corp., and Outback Steakhouse Inc. are all former borrowers.
In fiscal 2002, Congress initiated a program of fee reductions as part of its effort to jump-start the economy. For fiscal 2004, Congress granted subsidies totaling $101.2 million to the 7(a) program, which gave the SBA authority to guarantee loans totaling at least $12.5 billion. For fiscal 2005, the SBA contends that it can support the same amount of lending without any subsidies, as long as Congress doesn’t extend the fee-reduction program. The program expired in early October, and the loan-guaranty fee on the smallest 7(a) loans — those totaling less than $150,000 — doubled, to 2 percent. Loans of $150,001 to $700,000 reverted back to 3 percent from 2.5 percent. For loans above $700,000, the fee remains at 3.5 percent. Meanwhile, the annual loan-servicing fee the SBA charges lenders bumped back up to 50 basis points.
The SBA argues that the impact on small business of allowing its guaranty fees to revert to their prefiscal 2002 levels will be negligible — less than $10 a month for most borrowers over the life of the loan. Of course, many borrowers are required to cover those fees at closing, which for borrowers of larger loans could mean coughing up a couple of thousand dollars more to get their financing. While that might sound like a rounding error to larger companies, it can be significant to firms with five- or six-figure revenues.
Craig Lindgren, president and owner of Boulder Exhibits Inc., a St. Louis-based designer and builder of trade-show exhibits that does about $1 million a year in sales, says he would have been troubled by the prospect of paying higher fees on the 7(a) loan he took out in September. He borrowed $820,000 for 25 years to finance the purchase of a 23,000-square-foot office and warehouse. Although he’d qualified for a conventional bank loan, he says the SBA package allowed him to put less equity into the deal — just 10 percent — and conserve more of his working capital. Higher fees, he said, “would have deterred us from going with the 7(a) loan and would have made us look at other options.”
For some borrowers, of course, even higher guaranty fees would not offset the benefits of a 7(a) loan. Pattie and Wes Skaperdas, owners of manufacturing company Phipps & Bird Inc. in Richmond, Virginia, took out a 7(a) loan in May to retire existing debt, fund the purchase of a new computer system and plastic molds, and expand the firm’s powder-coating operations. The “$600,000-plus” borrowing, says Wes Skaperdas, has a 10-year term and a floating rate of prime plus 2.75 percent. Higher fees, he says, probably would not have scared his firm, which generates about $2 million in revenue annually, away from the SBA. “First of all, we didn’t have too many options,” he explains. “We had been talking to other lenders for about two years, and were turned down by just about everybody. While an increase in fees would have been a burden, my cash flow has improved so dramatically from doing this that it would have easily absorbed any fee increases.”