Fees Get Fatter

But are they hurting entrepreneurs?

Ike C. Iregbulem, president of Opulent Lifestyle, a concierge service in New York with $100,000 in sales, was ready to expand. His two-employee company was approved last fall for a $40,000 loan backed by the Small Business Administration's 7(a) program. Then he found out about the loan's $2,000 up-front fees -- including $680 to the SBA -- and backed out. "That's a lot of money for a startup," he says.

Is his situation increasingly common? Or an anomaly? It depends on how you interpret SBA data and how much of the variation in loan volume you attribute to other factors, such as the health of the economy.

In October, Congress doubled fees on most 7(a) loans, from 1% to 2%. The hike was only the most recent skirmish in the battle over 7(a) loans. In January, 2004, Congress briefly shut down the program amid partisan squabbling about funding. It reinstated the 7(a) with a $750,000 cap -- half the previous limit -- then boosted the cap to $2 million. Republicans argued that higher fees were needed to make the program self-funding, while opponents said the fees would discourage borrowing.

In April, the SBA said lenders made 46,603 7(a) loans totaling $6.98 billion in the six months since the rate increase -- 27% more than last year. But the year-ago figures include both the shutdown and the lower loan cap, making them easy to beat. Representative Nydia Velázquez, (D-N.Y.), the ranking Democrat on the House Small Business Committee, instead compares recent loan volume to that of the quarter ended Sept. 30, 2004, before fees went up. She says lending fell by 20%.

Lenders such as Minneapolis-based U.S. Bank, fearing that higher fees will deter borrowers, are paying some 7(a) fees themselves and waiving other charges. "We believe fees have gotten too high, and we want to continue to be competitive," says David H. Bartram, president of the Bank's SBA division. He says lending was flat in 2004 because of higher fees and loan caps.

Still, Representative Donald A. Manzullo (R-Ill.), chairman of the House Small Business Committee, isn't worried about the higher fees. "I have not had one businessman complain," he says. Fair enough. But Iregbulem opted for a no-fee loan from his credit union.

By Jeremy Quittner

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