From the Office of Senator Kerry

Friday, January 19, 2001

WASHINGTON, D.C. - Today the Small Business Administration (SBA) announced that it will allow some borrowers to "swap" interest rates on 7(a) loans. This policy will give small businesses the ability to stabilize the amount of their loan payments each month and better control their cash flows. In rate swap agreements, borrowers essentially buy "insurance policies" from banks or other entities that insure a fixed interest rate on their loans. This is attractive to 7(a) borrowers because most 7(a) loans have variable (fluctuating) interest rates. The potential for increases on their loan payment amounts can be stressful for small business owners who typically have small cash flows and narrow operating margins. For example, a borrower may have a variable interest rate on a 7(a) loan at 11.5 percent. This rate could increase dramatically and make it difficult to make payments. Under the new policy, the borrower could enter into a rate swap contract with his bank and lock in for two years a fixed interest rate of 12 percent. "This change will allow small business borrowers a way to protect themselves against rising interest rates. It means increased financial stability and peace of mind for so many small businesses." said Kerry. "Small business owners can now choose more control over their operating costs by locking in fixed interest rates on their 7(a) loans. It is an option that big businesses have had through commercial lenders for years and is a business advantage that should be afforded to 7(a) small business borrowers." This policy change was requested by several of SBA's participating lenders, including FleetBoston Corporation, that asked the Agency for the authority to sell interest rate swap contracts to their small business borrowers that have SBA guaranteed loans. SBA is issuing a notice to put this new policy into place and will be notifying lenders of the change. SBA will allow 7(a) borrowers to enter into interest rate swaps agreements only if their loans are with lenders that have the capacity to do so. SBA will monitor this new policy and review its impact after a year. As SBA assesses the program, Kerry encourages the Agency to consider ways to make the policy available as comprehensively as possible. The 7(a) Guaranteed Loan Program is one of SBA's primary lending programs, and can be used for most business purposes, allowing small businesses to buy furniture, equipment, and inventory and bolster working capital.