By Erin Chambers

Congress handed the Small Business Administration a mixed bag during its final session of the year, passing an appropriations bill that boosted funding to a number of programs while cutting others and slashing the agency's overall budget by nearly $200 million. In total, the SBA received $580 million for 2005, a drop of nearly 25% on last year and a far cry from its $900 million purse in 2001.

Despite consistent budget cuts each year since President Bush took office, SBA Administrator Hector Barreto says he remains optimistic and confident in the current Administration's support for the development of small businesses (see BW Online, 11/09/04, "What Price a President's Promise?"). "This is an important win for small businesses and will ensure long-term stability to the program," Barreto said in a statement.

STARTUP BOOSTERS.  The 504 loan program -- commonly used by small manufacturers to purchase real estate, buildings, and machinery -- was among the winners, with a boost that will allow it to back $5 billion in loans. The maximum loan size available to potential small-business owners grew to $4 million.

The SBA's flagship 7(a) loan program was increased to a $16 billion level, $3.5 billion over last year. The maximum loan size available remained at $2 million. Congress also made permanent the popular SBAExpress program, which lessens the amount of paperwork entrepreneurs must file when applying for 7(a) loans, but also doles out smaller sums. With the passage, the maximum loan size increased to $350,000, up from $300,000 last year.

The flexible program is popular with borrowers who might not be eligible for loans through traditional lending channels like banks. Funds are often used to buy franchises or for startup costs that come with launching a new business. In fiscal year 2004, which ended Sept. 30, the SBA reported guaranteeing a record 75,825 loans (over $12 billion in the 7(a) program).

The 7(a) program, named after the 7(a) chapter of the 1953 Small Business Act that created the SBA as an advocacy for small-business owners in Washington, came under fire earlier this year when the agency was forced to shut it down in January due to increased demand and depleting funds.

HIGHER FEES.  To resolve the issue, the government increased the 7(a) loan guarantee to $1.5 million in the 2005 budget, up from $1 million the previous year, but the program now operates at zero-subsidy, meaning it's self-sufficient and supported by increased fees paid by borrowers and lenders. The SBA hails the self-sufficient program as one less burden for taxpayers, but critics see it as another sign of the dwindling support for small business in Washington.

Rhonda Abrams, a former serial entrepreneur and best-selling small-business author, says adequately funded SBA loan programs are a "tremendous success in getting businesses to grow and succeed." But she also notes that making programs like the 7(a) self-sufficient "means raising fees, so it costs more to apply for loans."

The government guarantee on the 7(a) SBAExpress loans remained at 50%, meaning the SBA will repay commercial lenders only half of their losses should a borrower default, a potential point of contention for banks and lenders that are granting loans to people who normally wouldn't qualify without government-backing. While some fear that lenders will ditch the program altogether, Abrams says it's more likely they will cherry-pick -- "choosing only those borrowers who are exceptionally good risks, making loans harder to get for those who don't look like traditional, conservative business borrowers."

MORE APPLICATIONS.  Thomas W. Burke, SBA National Program Director for Wells Fargo Bank (WFC ), says he has received "very little" negative feedback from borrowers about the changes to the 7(a) program. "The number of applicants continues to increase, which indicates that borrowers recognize that SBA loans are still a viable financing alternative, even with the fee increase," Burke says. Like other lenders, Wells Fargo will often finance the fees with the loan, spreading out the cost over a longer period and lessening the upfront burden.

On the chopping block in the SBA's 2005 budget is the Participating Security program, which funds small-business venture-capital and private-equity funds. While the SBA did include $3.25 billion for the Small Business Investment Company's (SBIC) debenture financing, it will not license any new SBICs in the fiscal year 2005. Typically, SBICs are smaller funds that provide venture capital to regions outside the entrepreneurial hotbeds of California and Massachusetts. The program has incurred heavy losses of nearly $2 billion in recent years and structural problems as well, according to the SBA.

Other entrepreneurship programs received funding at the same levels as 2004, such as SCORE, Small Business Development Centers, Women's Business Centers, and veterans and Native American programs.

PENNYWISE PERSPECTIVE.  "The SBA performs a critical role in helping to launch many entrepreneurs who would not otherwise get funding," says Carl J. Schramm, president and CEO of the Ewing Marion Kauffman Foundation in Kansas City. "The increase in loan guarantees will provide a critical funding resource to thousands of qualified small-business owners, particularly women and minorities, who are starting businesses in increasing numbers."

Loan applications are expected to hit a new record in 2005, even with latest round of SBA budget cuts. So like entrepreneurs themselves, the SBA is learning to do more with less.

Chambers is a reporter for BusinessWeek Online in New York