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On this Subcommittee, we are focused on making sure that small businesses, whether in my district in New Jersey—in Ranking Member Hern’s district in Oklahoma, and in every other district across America, can access the capital they need to start, grow, and create new jobs.And we know that when capital is affordable and accessible, small businesses can do what they do best, strengthen our communities and fuel our economy. 

This is something I’ve witnessed firsthand in my home state of New Jersey, where more than 850,000 small businesses make up 99 percent of our state’s businesses and employ over half of our workers—making them an essential part of our economy and way of life. Recognizing that access to capital is a challenge for many entrepreneurs, SBA offers a variety of loan programs designed to help borrowers who may have a difficult time securing financing through the conventional lending markets.

Which brings me to the reason we are here today. And that is to ensure that SBA’s flagship 7(a) loan guarantee program is functioning to best serve our small businesses and taxpayers. This critical program has been a vital source of capital access for thousands of small businesses in my home district since 2008. In 2018 alone, the 7(a) program has supported 185 businesses in my district, totaling over 58 million dollars in loans. The loan program has served businesses across a highly diverse array of industries, ranging from catering companies to nurseries. 

Under the 7(a) program, SBA partners with banks and non-bank lending institutions who make loans to small businesses, with SBA reimbursing a portion of the loan in the event the borrower defaults, also known as the guarantee. This guarantee minimizes the lender’s risk in making the loan to the small business. 

Generally, SBA guarantees from 50 to 90 percent of each 7(a) loan made, depending on the loan characteristics. To offset the costs of issuing these guarantees, SBA charges an up-front, one-time guarantee fee and an annual, ongoing service fee for each 7(a) loan approved and disbursed. 

Traditionally, one of SBA’s goals is to achieve a “zero-subsidy” rate for its loan guarantee programs, including for 7(a) loans. This occurs when the programs are projected to generate enough revenue through fees and recoveries of collateral to issue that year’s guarantees without requiring a Congressional appropriation. To calculate the subsidy rate, SBA and the Office of Management and Budget use an econometric model that takes into account numerous macro-economic and SBA-specific assumptions. If they predict a shortfall, SBA requests an appropriation from Congress to address it. Excluding the period from 2010-2013 – when the nation was recovering from the Great Recession – SBA has operated at zero-subsidy since 2005.

However, in its Congressional Budget Justification for FY2020, SBA predicts that without modifications to current law, it cannot achieve a zero-subsidy rate for the 7(a) program. I look forward to hearing from Mr. Gribben about what goes into the calculation and understanding why cash outflows exceed inflows resulting in a “positive subsidy” in the 7(a) program for FY 2020. In response to the positive subsidy, SBA proposed numerous and considerable fee increases on both borrowers and lenders. This has caused a great deal of anxiety among small business borrowers and the lending institutions that participate in the 7(a) program. 

Any increases in fees, like those SBA has suggested, to cover this shortfall could result in fewer small businesses applying for and getting access to capital.  That is why today’s hearing is so timely and important. And I look forward to hearing from our witnesses on potential solutions to this issue.  We can all agree that these programs are incredibly important, and I look forward to working with my colleagues on both sides of the aisle to address the challenges facing our small business owners when it comes to securing capital.