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Greatest Hits: Overhauling The Small Business Administration

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While I am often critical of the Small Business Administration, that doesn't mean that this federal agency doesn't have its good points or conscientious staffers.

A Portland gentlemen named Dick Lane (now retired) was a dedicated small business champion and was very helpful to my manufacturing business over the years. I've met some other good folks, too. Sadly, such small-business oriented people are becoming a rarity at the bloated bureaucracy known as the SBA.

During my 24 years as a volunteer counselor at SCORE, I ran into a lot of SBA drones. And was exposed to many costly and wasteful 'programs' that did nothing to help promising small businesses.

Wasting Tax Dollars At The SBA: Kent Hoover has reported, "U.S. taxpayers are putting more money than ever into subsidizing Small Business Administration loans - an unsustainable trend as an era of budget austerity looms.

small business administrationNext year, the SBA will need $351 million in subsidies - 37% of the agency's overall budget request to support $22 billion in government-guaranteed loans to small businesses. That's up from this year's subsidy of $210 billion, and $83 billion in subsidies in both 2010 and 2011. From 2005 to 2009, the SBA's loan programs didn't need any government subsidy - fees to borrowers and lenders covered all their costs."

The 2005-09 results represent the way the SBA loan program is supposed to work. But it has become an out-of-control, money-sucking government bureaucracy.

By guaranteeing 90% of a business loan, the SBA assumes almost all risks, encouraging banks to lend less prudently. That's not a good thing, especially now that we know that banks are such dummies, staffed by Formica-polishing monkeys instead of knowledgeable loan officers. The number of loans guaranteed by the SBA zoomed from less than 20,000 in 1990 to over 95,000 in 2005. In many cases, the SBA is paying the guaranties even though lenders failed to follow agency requirements in making these loans, according to Peggy Gustafson, SBA Inspector General.

Gustafson's office found material deficiencies in 14 out of 25 SBA loans it sampled for audits in 2010. Paying the guaranties on these loans cost the agency nearly $11 million. "The SBA faces a heightened risk of losses and improper payments due to expedited loan processing initiatives and its considerable reliance on outside financial institutions over which the agency does not always exercise adequate oversight," Gustafson said.

Congress' decision in 2010 to increase the maximum size of SBA loans from $2 million to $5 million increased the risk of losses to the government from loans that shouldn't be made, she said.

The wasteful SBA does little to actually assist enterprising small business owners these days. Much of the agency's focus is on businesses in big trouble, minority enterprises and women-owned businesses. Cash-needy, emerging growth companies, which may actually help fuel the economy are strictly low-priority.

Many of the loans are given to inherently risky businesses, like restaurants, which have high failure rates and bring little in the way of real, new jobs. New restaurants mostly drive other restaurants out of business. Net job gain = 0.

Do we really need the government underwriting more restaurants, gas stations, nail salons, dry cleaners and motels? Shouldn't the number of such businesses be driven by local marketplace conditions (i.e. - free enterprise)?

There are many wasteful government agencies which have spiraled out of control, lost the focus of their original mission and should be reformed or eliminated.

While much noise is made about the need to overhaul the Departments of Energy, Education, etc., let's not forget the Small Business Administration. (posted 4/11/12, permalink)


"... And We're Here To Help": U.S. Small Business Administration has run out of money for breaks that made its loans less risky for lenders and more affordable for small business borrowers. The economic stimulus bill temporarily increased the government guarantee to 90% on the SBA's flagship 7(a) loans and reduced or eliminated fees on 7(a) and 504 (bigger, long-term) loans, which are mostly used for real estate. These were supposed to "help small businesses in these tough times."

Just because you see the words "help small businesses" in a story, it doesn't mean that anyone worthwhile is actually being helped. It is a political feel-good phrase, designed to invoke universal citizen/voter support, much like "we must think of the children" or "aid the unfortunate."

Sadly, the reality is that the SBA is a wasteful government entity which does little to actually assist enterprising small business owners. Much of the agency's focus these days is on businesses in big trouble, minority enterprises and women-owned businesses. Cash-needy, emerging growth companies, which may actually help fuel the economy are strictly low-priority.

Many of the loans are given to inherently risky businesses, like restaurants, which have high failure rates and bring little in the way of real, new jobs. New restaurants mostly drive other restaurants out of business. Net job gain = 0.

Do we really need the government underwriting more restaurants, gas stations, nail salons, dry cleaners and motels? Shouldn't the number of such businesses be driven by local marketplace conditions (i.e. - free enterprise)?

By guaranteeing 90% of a loan, the SBA assumes almost all risks, encouraging banks to lend less prudently - not a good thing.

In late 1979, my small manufacturing business got its first and only SBA loan. It came with a lower guarantee and we paid a substantial interest premium - indicative of our riskiness as a borrower. We had to provide substantial documentation including a business plan to get it. We were told that the turn-down rate was quite high for SBA guarantee loans.

Because the loan was burdensome (interest rates, conditions and reporting requirements), within three years we replaced it with a conventional direct bank loan, which had a lower rate and a shorter payoff period.

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In 1981, my business secured an order from Purdy Brush Co. for plastic tote bins. Used internally to transport brush blocks, they replaced heavy, splintery wood boxes. I came up with the ribbed bin design and specified/obtained the recycled off-white ABS plastic which provided durability but kept costs down. That's my 10 year-old daughter holding a finished bin.

Our SBA loan - though burdensome - provided us the required working capital to handle large orders such as this. Such jobs helped our manufacturing firm grow at an average annual rate of 44% over an 11 year period.

Here's our plastics vacuuming forming machine on which we produced the tote bins:

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That was then. These days, SBA loans = Easy Money. That's a recipe for disaster - for the business, the bank and us taxpayers who are funding the Small Business Administration.

If the SBA closed tomorrow, it probably wouldn't be missed very much in the business community. Let's either shutter it or streamline it. Let's eliminate overlapping services - especially the unneeded Women's Business Centers and inner city counseling operations - while encouraging support for those small businesses which will create job-growth and, by offering products/services which are sold nationwide or worldwide, bring new dollars into local communities. (posted 6/9/10, permalink)


They Should Rename It NVSBA ... for Not Very Small Business Administration. A representative from the Small Business Administration said, "Effective Aug. 1, a new standard allows small businesses with a net worth of $8.5 million or less and a net income of $3 million or less to qualify for the program." Karine Decker, finance director of Midwest Small Business Finance, noted, "That's a substantial increase that will allow a number of other businesses to take advantage of these attractive rates and terms."

The above refers to the SBA loan guarantee program. While it's hard to extrapolate, most businesses meeting the top end of these criteria probably have sales revenues in the $50-100 million dollar range. That's not my idea of a small business.

If a firm with a net worth of $8.5 million and/or a net profit of $3 million can't get a loan from conventional sources, it must be in pretty bad shape. And I don't think my tax dollars should be guaranteeing loans to such firms. However, I'm OK with the idea of my tax money being used to guarantee loans to those reasonably healthy businesses shunned by banks because the businesses are young and don't have enough of a track record. Especially if the business will create net new jobs in a community - not just 'steal' them from another local business (i.e. - new restuarant drives old restaurant out of business).

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In late 1979, my manufacturing business got its first and only SBA loan. We were told that the turn-down rate was quite high for SBA guarantee loans. Because the loan was burdensome (interest rates, terms & conditions and reporting requirements), within three years we replaced it with a conventional direct bank loan.

That was then. These days, Easy SBA Money is a recipe for disaster - for the business, the bank and the taxpayers.


Regular readers know that I'm a fan of small business in general and would probably enjoy traveling back in time and having a cocktail with George F. Babbitt at a plush hotel bar in downtown Zenith whilst discussing Boosterism.

But I worry that the SBA's programs focus too much on businesses in trouble, minority and women-owned businesses but not enough on emerging growth companies. (In 2004, in accordance with the SBA's goal of helping minority- and women-owned small businesses, 29 percent of 7(a) loan guarantees went to minority business owners. That percentage has increased steadily from less than 13% in 1990 to almost 29% in 2004. This figure is especially striking given that, in the most recent statistics, minority-owned businesses accounted for just 18% of all firms.)

Veronique de Rugy of the American Enterprise Institute produced a report which "demonstrates that white men and women can expect similar treatment in credit markets. Furthermore, their results suggest that there are even some advantages for female-owned firms located in concentrated banking markets. The leader of Women Impacting Public Policy, a women's business advocacy group, confirms that women are extremely successful in accessing credit. She points out that nearly half of all privately-held businesses are owned by women, and they are growing twice as fast as other companies."

As for minorities, an SBA-sponsored study underlines that while minority small business owners have more difficulty accessing credit than white owners, the credit constraints vary across different loan and lender types. In other words, discrimination may be confined to only some segments of the loan market. Furthermore, difficulty accessing bank loans does not imply no access to loans at all. While minority firm owners are less likely to have bank loans of any kind, they have easy access to transaction loans from non-banks.

The number of loans guaranteed by the SBA went from less than 20,000 in 1990 to over 95,000 in 2005. As Craig, Jackson and Thomson (in their 2005 study cited by Ms. de Rugy) point out, "These lending numbers are remarkable when one considers that SBA loan guarantees are aimed at that segment of small business borrowers that presumably would not otherwise have access to credit."

In 2004, the SBA granted loan guarantees to the following types of businesses:

1. Restaurants and Eating Places - 5,803 loans
2. Doctors, Dentists and other Health Practitioners - 2,945
3. Automotive Repair - 2,482
4. Personal Care Services (salons, spas, etc.) - 1,267
5. Gas Stations - 1,208
6. Building Services (janitorial, landscaping, etc.) - 1,060
7. Grocery Stores - 1,018
8. Hotel/Motel - 987
9. Trade sub-contractors - 929
10. Drycleaning and Laundry Services - 900

These top 10 business categories represent about 36% of all SBA guaranteed loans. None of these businesses are the type which really build up a town; most do not represent high-tech, high-wage kind of businesses which will help make America more competitive in today's world economy. Do we really need the government underwriting more restaurants, gas stations, nail salons, dry cleaners and motels? Shouldn't the number of such businesses be driven by local marketplace conditions (i.e. - free enterprise)?

The SBA spends money on non-loan activities as well; it has a budget of over $600 million. Including over $110 million for Small Business Development Centers (SBDC) and $13-plus million for Women's Business Centers (WBC).

Meanwhile, the SBA is choking off SCORE funding - a paltry $5 million - in favor of SBDC and WBC operations. The latter entities are far less efficient in delivering services than SCORE but employ paid staff rather than volunteers, thus swelling the SBA's ranks and creating extra levels of wasteful bureaucracy.

SCORE's all-volunteer army provides assistance to about the same number of clients as SBDCs at far less cost to taxpayers. SCORE assists almost five times as many clients as WBCs. Ken Yancey, chief executive officer of SCORE, said, "SCORE's cost to assist an individual business was $29, while SBDC's was $13,810 to help a start-up and $2,288 to help a long-term client. Women's Business Centers' cost to assist an individual business was $139."

SCORE helped create more than 25,000 new jobs nationwide in 2004, or one for every seven new clients.

Yancey noted that "the SBA has requested $250,000 for inner-city counseling that would benefit just 250 people. This cost-per-client of $1,000 greatly exceeds SCORE's cost-per-client of $29." He pointed out that "this request is another example of inefficiency and duplication of services on the part of the SBA."

It's time to streamline the SBA. Let's eliminate overlapping services - especially the unneeded WBC and inner city counseling operations - while encouraging support for those small businesses which will create job-growth and, by offering products/services which are sold nationwide or worldwide, bring new dollars into our local communities.

Even George Babbitt knew that's how you create healthy towns. And a healthier America. (posted 8/18/08, permalink)


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