July 15, 2015
By Tom Wallace
Later this Fiscal Year, quite likely sometime in August, the 7(a) Program will come up against “Authorized Program Level”. What does that mean for SBA lending?
Budgets in politics are not exactly the same as in finance, and for better or worse, we are a political program, subject to the political process. Thus a lesson on the lingua franca of Budgets in that faraway land, wherein plays out our political process, is in order.
Two terms which every SBA participant must know are: “Appropriations” and “Authorized Program Level”.
“Appropriations” are actual money, proposed by the President, appropriated by Congress and approved through the legislative process, culminating in the President’s approval. SBA, as a federal Agency gets an “Appropriation” for direct operating costs: staff, occupancy, etc. At this writing, for the coming Budget, the loan programs of the SBA, the 7(a) and the 504, do not require an “Appropriation” as the programs are funded by lender and borrower fees. How these fees are calculated is referred to as “the subsidy rate”; a topic which borders on alchemy and is best left for another day.
“Authorized Program Level” is a bit more nebulous. The “Authorized Program Level” is the absolute dollar amount of loans that a program can “authorize”-read approve-in a given year. “Authorized Program Level” is calculated based on the federally supported dollars: thus the guaranteed portion of 7(a) loans and the gross debentures of 504 loans. In essence, this is control mechanism from the political process to manage the size of a given Federal program.
For the current Federal Fiscal Year the 7(a) program is “Authorized” at $18.75B. (Yes, Billion with a “B”.) The 504 is at $7.5B.
Later this Fiscal Year, quite likely sometime in August, the 7(a) Program will come up against “Authorized Program Level”. Predicting exactly when this will happen is notoriously difficult as it involves a number of factors, including: new approvals, SBA’s processing of such, and cancellations of previously approved loans within the current fiscal year.
Running out of “Authorized Program Level” is like having money in your checking account, but not having checks. In this situation, the worst case, is that 7(a) lending stops for some period of time.
The good news is, the SBA lending industry will not be asking for an “Appropriation”, we are asking for an increase in “Authorized Program Level”. You may be forgiven for thinking: “so no money is on the table, so what is the problem?”. Now comes the politics. There are a number of groups who are philosophically opposed to any Federal involvement in the credit markets. You need look no further than the recent expiration of the charter of the Ex-Im Bank, a federal entity supporting exports and creating jobs.
In financial matters, predictability and delivery are critical components. Politics is based on philosophy and human nature, neither of which is notably predictable. Borrowers and Lenders both rely upon a reasonably predictable process to make the business of SBA lending work for and to everyone’s benefit. The only way to make the political process predictable is to participate in it. Have your Borrowers contact their members of Congress and let them hear about the direct and demonstrable benefits of SBA lending, the philosophical concerns will fall into second place.
Tom Wallace is President of IDS Corporation, a CDC based in Fort Myers, Florida.