Overhauling the federal small business lending program is shaping up to be a hot issue in Congress next year.

As Democrats take control of Congress next month, they want to expand the Small Business Administration’s main 7(a) lending program by reinstating federal subsidies, reducing fees for businesses seeking government-guaranteed loans and making loans more available to minority-owned businesses.

“Small businesses are getting less capital today and they are having to pay more for it,” said Rep. Nydia Velazquez, D-New York, who will take over in January as chair of the House Small Business Committee.

Besides changing the 7(a) program, Democrats want to keep the SBA’s Microloan program from being eliminated and they want to overhaul the agency’s disaster loan program. Velazquez’s Democratic counterpart in the Senate is former presidential candidate John Kerry, D-Mass., who will take over the top small business committee post in January.

Lenders and their Republican allies, meanwhile, say they will push to raise the loan cap on the 7(a) program, allowing them to make loans greater than $2 million.

“There’s a gap right now in SBA loans. We can make really small loans and very large real estate-oriented loans, but we’re increasingly unable to package loans for businesses in between,” said David Bartram, president of the SBA lending division of U.S. Bancorp and chair of the board of the National Association of Government Guaranteed Lenders.

In making their cases for changes to the 7(a) program, both sides are pointing to a sharp drop in the average 7(a) loan size to businesses to $160,000 in 2005 from $232,000 in 2001, even as overall business costs have risen.

That drop is by design and stemmed from an overhaul of the popular lending program three years ago to prevent it from constantly running out of money and seeking additional subsidies from Congress. To make the program self-sustaining, the Republican-controlled Congress approved Bush Administration proposals to raise borrowing fees to between 2 percent and 3.75 percent of the loan amount. Also, the SBA itself decided to focus on smaller loans so it could assist more businesses.

Many entrepreneurs and small business owners complained about the higher fees and, in the last year especially, have sought cheaper start-up financing elsewhere. What’s more, many small business owners are saying the SBA lacks the staff and resources to provide assistance in obtaining the loans.

“Large businesses get all the subsidies and tax breaks, but small business support has been greatly shortchanged,” said Jorge Corralejo, owner of Los Angeles-based Macondo Leasing Inc. and head of the Latin Business Association’s government relations committee.

As a result, many institutions are making fewer SBA loans this year than last year. That has prompted the renewed interest in reforming the 7(a) program.

SBA officials say the program is working well, and that the new fees have kept it on strong financial footing. And while lenders are not opposed to reinstating subsidies, they are instead pushing to raise the 7(a) loan cap from the current $2 million to $3 million. They claim that the cap no longer meets the needs of businesses facing constantly rising costs.

Democrat leaders have not taken a formal position on this yet, but have expressed concern that raising the cap without reinstating subsidies could put the program back on shaky footing. Mike Stamler, an SBA spokesman, said the agency believes it is premature to raise the loan cap, noting that only 3 percent of SBA borrowers seek loans of more than $1 million.

The micro battle

Another fight is expected over the fate of the SBA’s popular Microloan program. This program uses federal funds to target business borrowers with low credit scores and has a cap of $35,000. It has become a source of start-up capital for low-income entrepreneurs.

Earlier this year, the Bush Administration proposed eliminating the program, saying it was too expensive and that its goals can be achieved through the agency’s Community Express loan program aimed specifically at minorities. But the House reinstated funding, at least for the current fiscal year ending next September.

Democrats contend that it’s hard for borrowers with low credit scores to qualify for the Community Express program and that many nascent business ventures would simply fail without the Microloan program. But to cut down on the risk of default, Velazquez said small businesses need more financial training before they receive a loan.

Meanwhile, both Velazquez and Kerry have said they want the SBA to do more outreach to minorities, with Kerry proposing a separate Office of Minority Small Business Development within the SBA.

Some of these debates may be overshadowed by the push to overhaul the SBA’s disaster loan program, which was sharply criticized for its response to the devastating 2005 hurricanes. Waits of six months or more for disaster loans were common.

Velazquez said she wants to see more disaster assistance funding for the SBA.