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Sizzle Will Fizzle If Congress Fails to Appropriate Funding For SBA 7(a) Program
(This article appeared in the March 2003 edition of the Franchise Times)

By Penn Ritter

SBA loans delivered capital to the tune of $ 1.2 billion in fiscal 2002, much of it to single unit operators. Franchisees in 740 different franchise operations used the SBA guaranteed loan program to purchase or expand a franchise business. Yet the sizzle will fizzle for fast casual and other concepts if Congress fails to appropriate funding for this year's SBA 7(a) program. Lenders will not make aggressive franchise loans without the comfort of a government guarantee backing it up. What's going on?

This year Congress is refusing to fully fund the SBA, forcing it to lower the loan cap to $500,000, down from $1,000,000. This lack of funding and the reduced loan cap would particularly devastate potential single-unit franchise owners, both start-ups and those buying a second or third unit with sound projected cash flow but little collateral. A start-up 'cash flow' or working capital loan based on projections, not on historical results, is the tropical fruit of the franchise world. And a difficult loan for a lender to fund. Franchise systems relying on individual growth-one at a time in multiple regions around the country-would be hurt the most.

Larger loans such as those in the motel industry, usually to purchase both the business and the real estate, will also be hurt by the loan cap. Piggyback loans and 504 loans are possible, but they add complications and time to an already complex and time consuming business.

A Little History

For twenty years the National Republican Party has spoken with two vocal and opposing views concerning the appropriation of funds for the Small Business Administration's 7(a) program.

In 1982, Republican Budget Director David Stockman advocated abolishing the SBA program entirely. Republican Senator from Connecticut, Lowell Weicker, who chaired the Senate Small Business Committee, publicly fought Stockman and Stockman's boss, President Reagan, to restore funds and save the day for the SBA and the borrowers who use the SBA loan program.

The battle was quiet for a while until 1992, when, as part of Newt Gingrich's Revolution, the SBA was again cut by republicans in Congress then saved by Republicans in the Senate, most notably Republican Senator Christopher Bond from Missouri, who was until recently Chair of the Senate Small Business Committee.

The new Chair, Republican moderate Olympia Snow from Maine seems to have inherited the same drive to save the SBA from members of her own party as she recently sponsored an amendment, which passed unanimously, that would authorize the reprogramming of any unused STAR (Supplemental Terrorist Activity Relief Program) money into the regular 7(a) program.

The STAR money was a multi-billion emergency relief fund for small businesses that were directly affected by the terrorist attacks on September 11th. Lenders felt the guidelines were too narrow and didn't make many loans. Lenders were also worried that the SBA might not honor its guarantee in the future if the loans went south. Consequently, 2 billion dollars remain unused. Senator Snow's amendment, co sponsored by democratic Senator John Kerry of Massachusetts, also a very strong advocate for small business, (S. amdt.129 to H.J. Res.21), added these funds.

BUT the Office of Management and Budget has long had a few bureaucrats who also dislike the SBA program. The subsidy rates they use to determine the cost of the program have been way off for years-former SBA head Aida Alverez claimed it to be 1 billion dollars over the last 10 years. Nobody disagreed with her. OMB liked the 'tax on small business' since they too did not like the program. Fortunately new political appointments including SBA Administrator Hector Barreto and Associate Administrator James Rivera understand the econometric modeling, and with some political pressure the OMB has changed its method to accurately reflect the true cost of the program. Since the cost is lowered, the funding is easier to allocate.

A Happy Ending This Year?

The recalculated econometric model combined with the STAR funds may restore full funding to the SBA this year-possibly by March 1. National small business lobbyists stormed the Capitol together to push for fully funding the SBA, including the National Federation of Independent Businesses, a powerful group with a national base, and the National Chamber of Commerce, a group not usually concerned about small business issues.

Franchise systems such as Super Eight Motel and Subway Sandwich Shop, the two largest users of SBA loans in 2002, might be comforted that Senator Snow and Senator Kerry have vowed to pass the SBA appropriation with bipartisan support. It is probably no accident that after Snow joined with Senators Kerry and Joe Lieberman, both democratic presidential hopefuls, The White House, perhaps worried about losing the small business vote, reigned in two difficult senators, Senator Kyl of Arizona and Senator Judd of Hew Hampshire, who have inexplicably opposed the SBA . Senator Joe Lieberman, also a terrific supporter of the SBA, is a member of the same small business committee.

Once again it looks like the SBA franchise lending/borrowing community is being saved with bipartisan support, lead by a strong-willed Republican senator protecting the American dream for those of us in flyover land. Lucky for the single unit operators, to those reaching for a second or third unit, to those who are buying real estate with their SBA franchise loan, and for those 740 different franchise systems eager to find a national or big regional SBA player to partner up to grow their concept. Get those national relationships and loan requests cooking. Next year is a different story.

Penn Ritter is co-founder, President and CEO of Business Lenders a non-bank SBA preferred lender. He formed the company's National Franchise Lending program and oversees its operation. For more information, visit www.businesslenders.com or call 877-34LOANS Ex. 118

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