The Small Business Administration will halve the cap on its 7(a) program loans, to $500,000, starting May 5.

Without the change, the current robust loan demand was expected to deplete the program's $7.8 billion budget by mid-August, or six weeks before the end of the current fiscal year, SBA Administrator Aida Alvarez said.

Additional restrictions could be imposed if heavy demand continues, she warned in a letter Tuesday to Senate Small Business Committee Chairman Christopher S. Bond, R-Mo.

The cap will have "a huge impact" on the bottom line of small-business lenders, according to Gary M. Youmans, executive vice president of Fallbrook (Calif.) National Bank. His bank alone could lose more than 20% of projected 1997 profits, he said.

Lenders will be forced to deny more applications, supplement SBA loans with nonguaranteed loans, and trim debt refinancing packages, Mr. Youmans said.

Anthony R. Wilkinson, president of the National Association of Government Guaranteed Lenders, said the Clinton administration must lobby Congress for an extra $43 million for the SBA.

"The administration is turning its back on small business if it doesn't at least make the attempt to get the supplemental appropriation," he said.

Sources, however, said the White House opposes a supplemental appropriation because it would require cutting other domestic programs. Ms. Alvarez, who took over the SBA in February, wrote Sen. Bond that another potential funding avenue would be raising the fees charged to lenders and borrowers.

Mr. Wilkinson said his group would fight "tooth and nail" any attempt to raise fees.

Not every lender was worried about the cap. "The impact on us is going to be zero," said Anthony J. Feraro, senior vice president of small- business lending at Zions First National Bank, Salt Lake City.

"It makes sense for them to fund a greater number of smaller deals than (to) turn the spigot off in August for everybody," said David B. Bundren, the American Bankers Association's associate director for small-business banking.

Under the $500,000 cap, the agency will continue to guarantee 75% to 80% of loan amounts. But its maximum exposure on any credit also will be cut in half, to $375,000.

Ms. Alvarez said 10% of the agency's 7(a) loans range from $500,000 to $1 million but that these loans have consumed 40% of the SBA's capital this year. The cap "is intended to dampen the demand in the larger loan range," she said.

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