The Small Business Administration has worked hard to make its flagship 7(a) loan program more attractive, adding lenders, slashing fees and cutting red tape to speed the review process.
Now, the agency is paying the price for its efforts.
Unprecedented demand exhausted the 7(a) program's $18.75 billion funding authority for the 2015 fiscal year, which ends on Sept. 30. Through July 11, the SBA reported that it had guarantees totaling $16.6 billion, with applications spiking.
The trend played out to its logical conclusion Thursday afternoon. Agency officials said the program had hit its ceiling and that new guarantees would be placed on hold until the new fiscal year starts on Oct. 1 or Congress provides supplemental funding authority.
An extended interruption in 7(a) operations would be a major black eye for the SBA, raising questions about its ability to consistently support small businesses. It could also result in headaches for lenders and delays for loan applicants.
"There's no good side to this," said Gary Youmans, a senior vice president at First Choice Bank in Cerritos, Calif. The $680 million-asset bank has made nearly 40 loans under the 7(a) program this fiscal year, totaling about $45 million.
"Banks might have to make some interim loans in some situations," Youmans said. "There are always risks when you apply a short-term fix to a long-term need, but I'm worried more for the small business owners. If they're counting on a loan application, all the sudden their lender is going to be telling them they won't have the money until Oct. 1."
Rep. Nydia M. Velázquez, D-N.Y., introduced a bill Tuesday that would increase the SBA's 7(a) funding authority to $23.5 billion. It has the support of SBA and the Office of Management and Budget, but Congress will have to move fast.
Lawmakers have begun considering Velazquez' legislation, but they have not announced a timeline for a possible resolution. "Things are moving in the right direction, but there is still no obvious clear path" toward a solution, Thaddeus Inge, the SBA's associate administrator for congressional and legislative affairs, said in an interview Wednesday.
House Small Business Committee Chairman Steve Chabot, R-Ohio, "is working with House and Senate colleagues to get to the best resolution on this as soon as possible, and they're considering every viable option," Kelly McNabb, the committee's communications director, said Wednesday in an email.
Congress cannot say it did not see the 7(a) funding crunch coming.
SBA Administrator Maria Contreras-Sweet, who warned lawmakers in a June 25 letter that the 7(a) program was headed for a shortfall, has asked for an increase in funding authority to $22.5 billion. "By our calculations, a shutdown could put several billion dollars of lending volume on hold throughout late August and September and have a deleterious effect on the economy," she wrote.
Ironically, the root of the 7(a) program's distress lies in its growing attractiveness. The 62-year-old program, where the SBA guarantees up to 85% of loans made to small businesses, has always been popular, but demand has seemed to kick into a new, higher gear over the last two years.
The gross dollar volume of loans guaranteed in fiscal year 2014 topped $19 billion, and it could easily surpass that total this year if Congress approves more funding. During a two-week span from June 13 to June 27, the SBA approved a $1.1 billion of loans.
"This is a record year," Ann Marie Mehlum, the SBA's associate administrator for capital access, said. "All the performance numbers are headed in the right direction. Everything is working and small businesses are benefiting."
Mehlum said SBA will place the applications it is forced to put on hold into a queue. It might be able to act on a handful, if any previously approved loans are canceled, but most would have to wait until the program can resume operations, Mehlum said.
"As additional program authority becomes available due to congressional action or as a result of cancellations of loans previously approved this fiscal year, applications in the Queue will be funded in the order they were approved by SBA," Mehlum said in a statement Thursday.
A similar scare took place last year. The 2014 shortfall, however, happened at the end of the fiscal year, so the worst-case scenario would have involved a curtailment of a few weeks. Even that was averted when Congress passed an eleventh-hour continuing resolution.
Because demand has been so strong for 7(a) guarantees this year, a shutdown could conceivably drag on for two months.
"We're seeing unprecedented growth in the program," Tony Wilkinson, president and chief executive of the National Association of Government Guaranteed Lenders, said. "That makes things difficult to predict. It's an issue of supply and demand. We're seeing much stronger demand than loan authority."
There seems to be bipartisan support in Congress for added SBA funding, Wilkinson said. The 7(a) program pays for itself through fees charged to lenders for the loan guarantees. The SBA doesn't need an appropriation, just the authority to approve loans above the current cap.
A shutdown would inevitably generate anger, though any long-term damage to the 7(a) program would be limited, Youmans said.
"I suspect there will be some animosity and some really upset individuals, but most people would have pretty short memories," Youmans added. "Right now, we are victims of our own success. The 7(a) program has become the way for banks to help small businesses grow."
The SBA, meanwhile, has submitted its proposed budget for fiscal 2016. In its mark-up, the House Small Business Committee has indicated that it would be willing to increase funding authority for the 7(a) program to $23.5 billion.