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New way to 7: with no more federal subsidy,.

New way to 7: with no more federal subsidy, entrepreneurs are uncertain about the future of small-business loans Entrepreneur, Feb, 2005 by C.J. Prince.

ENTREPRENEURS ARE NOT SURE WHAT TO make of the bill signed by President Bush in December to eliminate the $79 million federal subsidy for the SBA's loan guarantee program--and with good reason. Before the ink was dry, the spin was flying. One side, aligned with the White House, called it a small-business-friendly legislative compromise that would save the SBA's 7(a) program by making it "self-sustaining.

" The other side saw it as an unnecessary tax on small-business borrowers.They're both right to some degree. Congress raised the program cap to $16 billion from $12.5 billion, and restored the maximum SBA guarantee on 7(a) loans from $1 million to $1.5 million. But making the program self-sustaining ultimately means higher fees for borrowers and lenders, who will now subsidize the program in place of the federal government, with the SBA in the role of facilitator.

Borrowers will pay twice as much--now 2 percent--in fees to take out a 7(a) loan of $150,000 or less. And fees on larger loans up to $700,000 increased to 3 percent from 2.5 percent. But Mike Stamler of the SBA maintains that this is not actually a fee hike, since rates were only temporarily reduced in December 2001.

He adds that the fee difference is nominal.But others say the reason fees were reduced in 2001 (the reduction took effect in 2002) was that they were too high, and frustrated lenders were threatening to pull out of the program, recalls David Bartram, president of U.S. Bank's San Diego-based SBA division. "That doesn't mean [fees are] not too high now," he says, adding that, had the $79 million subsidy remained, fees could have remained at the lower rate.

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