It never hurts to have a little excess capacity when dealing with the Small Business Administration’s popular 7(a) loan program.

Linda McMahon, who runs the agency, provided assurances Wednesday that the program has enough funding authority to continue guaranteeing loans until its fiscal year ends on Sept. 30. Still, she is asking lawmakers to back a proposal that would let her implement a 15% increase in the program’s funding authority — currently set at $26.5 billion — to offset an unanticipated spike in demand.

“Such flexibility … could better equip SBA to meet peaks in demand while continuing to operate at zero subsidy,” McMahon said during testimony before the House Small Business Committee.

After the hearing, Rep. Nydia Velazquez, D-N.Y., the committee’s ranking member, introduced legislation that would empower the head of the SBA to boost the 7(a) funding level by 20% if needed to forestall a shutdown.

“When SBA reaches their statutory limit in the 7(a) lending program, it can result in delays for small businesses seeking loans to grow their operations and create job in the process,” Velazquez said in a statement. “My bill will grant SBA flexibility to adjust the cap. This will create a long-term solution … and stability in small-business capital markets.”

SBA lenders are broadly supportive of proposals that give the agency tools to deal with the potential funding crunches.

Linda McMahon, administrator of the Small Business Administration.
Linda McMahon, head of the Small Business Administration, is asking lawmakers to allow her to increase the funding authority for the agency's 7(a) program by 15% if there is an unexpected spike in loan demand. Bloomberg News

McMahon’s proposal “creates a common-sense solution to avoid the possibility of unnecessarily shutting down the SBA flagship loan program and halting small business' ability to grow jobs here at home," said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.

"We applaud … McMahon's leadership as she joins the lending industry to call for giving the [SBA] flexibility to raise the authorization or lending cap for the 7(a) program in years the lending cap is hit,” he added.

The 7(a) program is the SBA’s largest credit program, providing guarantees ranging from 50% to 85% on loans of up to $5 million. As McMahon noted, the program is operating in a zero-subsidy mode, meaning fees charged to lenders and large-dollar borrowers pay for its credit costs.

Congress continues to set dollar volume limits for loans the SBA can guarantee under the program, specifying 7(a)’s funding authority in the agency’s annual budget. Lawmakers have yet to approve a new budget for SBA, so the fiscal 2016 limit of $26.5 billion remains in place.

The issue of 7(a) funding is a highly sensitive topic. While no one wants to be caught off guard, too much talk of hitting the funding limit could create a self-fulfilling prophecy by spooking lenders and borrowers to scramble to get loans in the queue.

The program, which has broken lending records in back-to-back fiscal years and seems on pace to do so again this year, was forced to shut down for a week in July 2015 after a surge in demand consumed all available funding two months before the fiscal year ended. At that time, Congress scrambled to authorize an additional $4.75 billion in funding, allowing the program to resume operations a week later.

Some SBA experts have expressed concerns that the agency could be headed for an extremely close call this year, as the program guarantees loans at a brisk pace. Through the first half of fiscal 2017, the program guaranteed nearly $12 billion in loans, a nearly 10% increase from a year earlier.

While the total represents about 45% of the program’s current funding authority, industry experts and agency officials note that the pace of lending usually accelerates over the final six months.

“We’ll probably see an uptick in the second half of the year as we normally do,” said William Manger, associate administrator for the SBA’s Office of Capital Access and the official who oversees the 7(a) and 504 loan programs.

Manger said the agency believes the current funding authority provides enough capacity to end the fiscal year without an interruption or a need to raise the cap.

McMahon hammered that point home in her testimony Wednesday.

“While the agency is seeing increased demand from the small-business community, we are not currently in jeopardy of exceeding our capacity to meet such needs,” she said. The SBA “is in good financial condition with sufficient resources through the end of this fiscal year.”

Still, gaining the flexibility to increase funding seems to be a key goal for the agency. The SBA included a provision in its fiscal 2017 budget that would allow the administrator to authorize a 15% increase, but Congress has yet to act on it. If necessary, the SBA will re-insert identical language into its fiscal 2018 budget plan, Manger said.

The SBA is waiting to study the specifics of the bill proposed by Velazquez before weighing in on it, though Manger said the agency is “supportive of the administrator having the flexibility to increase the 7(a) authorization level.”

For now, Manger and his staff are keeping a close tab on 7(a) lending trends.

“I have someone who checks the numbers every day,” Manger said. “If we see them shift or change, we’ll act accordingly.”

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