Small Businesses Seek More Government Loans

SMALL businesses and their lenders are hoping the Senate will act soon to grant supplemental funding for the Small Business Administration's loan program. In an era of tight bank credit, the SBA program is increasingly popular as a source of cash for entrepreneurs, who are the economy's best hope for economic growth and job creation.

This week the Senate marked up a bill that has already passed the House. It would grant another $181 million to guarantee $3.3 billion in loans to be made before the 1993 fiscal year ends Sept. 30

Under the SBA's 7(a) program, the government guarantees 75 to 90 percent of loans up to $750,000. The term of the loans averages more than 11 years.

In fiscal year 1992, the SBA backed a record $5.62 billion in loans. Only enough money was appropriated to back $3.6 billion in loans this year, and that ran out April 27. Applications have continued to be processed at the rate of 100 a day, but are being held pending the authorization.

Douglas Kadison, chairman of Horizon Savings Association in Austin, Texas, says typical SBA borrowers are "a little younger. Their cash flows are a little more needy of extended terms."

"Obviously, the last several years there's just been a shortage of credit, so some people who wouldn't otherwise use the program used it," Mr. Kadison adds.

Indeed, demand has soared as federal bank regulators reacted to a slew of collapses by forcing lenders to improve the quality - reduce the risk - in their portfolios. But banks have found that regulators are happy when loans are guaranteed by the SBA. Even though it makes the banks safer, taxpayers remain at risk. Costs to the taxpayer

In the mid-1980s, the Reagan administration, with the backing of the 600,000-member National Federation of Independent Business (NFIB), tried twice to kill the SBA. Ten percent of loans went into default, four times as many as for a badly managed bank. David Stockman, Ronald Reagan's first budget director, called the SBA a "rathole."

Congress refused to let the agency perish, but lending standards were tightened. Direct loans have ceased. For every $100 of bank loans guaranteed by the SBA, the taxpayer lost $4.05 through defaults in 1987. That figure has fallen every year to $2.14 in fiscal year 1992. One in four delinquent loans is worked out and made current. With administrative and other costs thrown in, taxpayers spend $5 to $5.50 per $100 of guarantees.

The loans nourish fast-growing businesses that would not otherwise exist, says SBA spokesman Mike Stamler. Studies have shown that, if credited against the program's cost, the taxes collected from those businesses and their employees would make the SBA show a profit, he says.

Austin-based Mytech Corporation is an example. In 1987 electrical engineer Doug Myron decided to go into business making motion-sensors that turn off lights in an empty room. But the oil crash of 1986 had given Texas banks wobbly knees. His garage-based startup could get no loan. "We were too high-risk," he says.

Horizon Savings was founded the same year, but in the prevailing economic climate any lending looked dangerous. "We weren't quite sure what to do, but we knew that the more we did, the worse it would be," Kadison says. Horizon decided on a strategy of diversification among loan and deposit types, essentially becoming a small community banker. Its activities included making SBA-backed loans, which had fallen out of favor at other institutions, including one for $60,000 to Mytech. "Without the 7(a) program

there was no way we could get funding," Myron says.

Today Mytech has grown 840 percent and has 25 employees. Myron expects to do $2 million in business this year and to make the Inc. magazine list of 500 fastest-growing small private companies. Mytech is the third-largest company in the business, and the only one to make its product in the United States. "We're bucking the trend. We're providing manufacturing jobs," Myron says. Mytech returned to Horizon for three more SBA loans. Outgrowing SBA loans

After one more loan, Myron thinks he will have reached the 7(a) program's $750,000 limit. "We can now wean ourselves from the SBA program," he says. Commercial banks have expressed an interest, but with the 50-percent annual growth he predicts for Mytech, Myron will probably need an infusion from venture capitalists first.

"I'm a real supporter" of the SBA loans, he concludes. Funding for $6.6 billion in loan guarantees is proposed for fiscal year 1994.

Terry Hill, a spokesman for the NFIB, says the organization still opposes the 7(a) loan program because it adds to the deficit, causing interest rates to rise for the more than 99 percent of small businesses not using the SBA. NFIB has not opposed the reauthorization, being more concerned about a Clinton-created climate of uncertainty that is making business reluctant to hire and take out bank loans. "Everything is more tax and more mandates," he says.