Buddy, Can You Spare $43 Million?

A popular Small Business Administration loan program that saw a $1.5-billion surge in loans last month could run out of money before September, forcing small firms nationwide to go without SBA-guaranteed financing for a time.

Small Business Administrator Aida Alvarez, facing her first crisis since taking office in February, is working on solutions to stretch out the funds for the rest of the fiscal year, which ends Sept. 30.

She is expected to announce temporary modifications to the $7.8-billion 7(a) loan program later this week.

Already, 7(a) loans have been capped at $500,000. But that measure, taken May 5, simply resulted in surging demand for the loans.

“We now face a situation where the resources available for the rest of the year are probably not sufficient,” Alvarez told a congressional hearing last week. “I am concerned that any administrative action I might take . . . will only trigger another run.”

The crisis was brought about, in part, because of increased demand in California, including at the SBA office in Santa Ana.

Nearly 40%--$400 million--of loans approved during the surge between April 15 and May 9 were in California and Texas alone. SBA offices in Santa Ana, Los Angeles and San Francisco were among eight nationwide that accounted for 40% of loans exceeding $1 million that were made this year and in fiscal 1996.

The Santa Ana office, which serves Orange, Riverside and San Bernardino counties, approved $251.3 million in loans through April 30, up 62% for the year, said Dace Pavlovskis, SBA district counsel. The number of approved loans climbed 21% to 693, he said.

The main reason for the heavy demand is simply that real estate is much more expensive here than than in most of the nation, even after the long recession of the early 1990s.

“The same commercial building could cost $1 million out here as opposed to say, $500,000 in Mississippi,” Pavlovskis said.

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These loans, often longer-term and secured by real estate, result in fewer loans to rural areas, women-owned firms and start-up businesses, Alvarez said at the hearing.

“We have to . . . ensure that the limited and increasingly scarce guarantee resources are used in a way to provide access to credit for these underserved populations,” Alvarez said.

She announced a top-to-bottom review of the entire program. Recommendations for change are expected at the end of summer.

The 7(a) program is the SBA’s largest small-business loan program. It is designed to guarantee loans made by commercial lenders to small companies that face difficulty getting financing through regular banking channels.

The program has grown from $3.8 billion and 16,736 loans in 1990 to a high of $7.8 billion and 52,031 loans in 1995.

Shortfalls have arisen in the past. In 1993, the program was shut down for five weeks until Congress provided supplemental funds. In 1995, a lending cap was temporarily imposed, restricting loans to a $500,000 maximum to keep the program afloat.

A shortfall was expected this year. The SBA had originally asked for $11 billion in funds for fiscal 1997, but Congress approved only $7.8 billion.

Alvarez began monitoring the fund, expecting to place a loan cap on the program to avoid shutting it down.

On April 15, as required by Congress, she gave advance notice that a lending cap would be placed on the program May 5. If the cap had not been put in place, loans would have risen to $9.5 billion, she said. The cap announcement prompted lenders to rapidly process loans, creating the surge.

Alvarez said $43 million is needed to continue the program through Sept. 30. But neither Congress, which is focusing on balancing the budget, nor the SBA is inclined to push for the supplemental funds, those involved in SBA issues say.

Nonetheless, the crisis has generated a round of finger pointing in Washington.

Members of the Senate Committee on Small Business have criticized Alvarez for failing to notify them earlier that the program was heading toward a shortfall. They also blame her for starting the loan surge itself by giving advance notice of the cap. Alvarez has said that the 15-day advance-notice requirement itself created the surge and has asked for its elimination.

In Los Angeles, the cap has simply shifted lending from the 7(a) program to the 504 program, which uses real estate, equipment and other assets as lending collateral, said Alberto Alvarado, director for the Los Angeles district.

The area’s large business market, active lender base and aggressive SBA activity has made the office the top SBA loan processor nationwide, Alvarado said. The Los Angeles office ranks first out of 69 offices in the nation, with 1,185 loans totaling $392 million. Alvarado expects to top last year’s record of 1,860 small-business loans, valued at $506 million, with 2,000 loans this year.

Also contributing to this report was Times staff writer E. Scott Reckard in Orange County.

* LEARNING CURVE

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