The Small Business Administration

About

Created in 1953 as an independent agency of the federal government, the Small Business Administration's (SBA) number one strategic goal is growing businesses and creating jobs, and its second goal is to serve as the voice for small business. The major tools employed by the SBA are a range of financial assistance programs for small businesses that may have trouble qualifying for a traditional bank loan. SBA's programs also include financial and federal contract procurement assistance, management assistance, and specialized outreach to women, minorities and armed forces veterans. SBA also provides loans to victims of natural disasters and specialized advice and assistance in international trade. [1]

Budget

SBA's total budget request for FY 2015 $710 million. Of this amount, $47.5 is for business loan subsidy and $197.8 million is for non-credit programs. Other budget amounts include $19.4 million for the Office of the Inspector General and $8.5 million for the Office of Advocacy. This total is also inclusive of $32.2 million for administering non-Stafford Act disasters. SBA FY15 Budget Highlights

Small Business Investment Company (SBIC)

About

The SBA licenses, regulates, and helps provide funds for privately owned and operated venture capital investment firms through the Small Business Investment Company (SBIC). The SBIC specializea in providing long-term debt and equity investments to high-risk small businesses. Its creation was the result of a Federal Reserve study that discovered, in the simplest terms, that small businesses could not get the credit they needed to keep pace with technological advancement. [2]

Major Loan Programs

7(a) Loan Program

• The biggest program is the 7(a) Loan Guarantee, which guarantees as much as 85% of loans up to $150,000 and 75% of loans of more than $150,000. The maximum loan SBA guarantees is 5 million. [3]
• 7(a) loan applications are made to and funded by SBA accredited partners. When a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements. The lender is largely protected by the SBA guarantee.
• A small business pays between 7.5%-9.5% interest on their loan. This interest is split between: banks, which can charge no more than 2.75% on top of the prime rate (currently 3.25%), and a SBA guarantee fee ranging between 2%-3.75%. [4]
• In 2015 the SBA approved 63,461 7(a) loans for a sum of $23.58b at an average of $371k. The total of all loans guaranteed was $111.769b with a bad debt rate (called charged off) of less than 1 per cent. [5]
• 7(a) program is targeted towards larger companies with 2-3 years of experience. This loan is not geared towards startups or "smaller" large businesses, as evidenced by the average loan size of $317,000. [6]

8(a) Business Development Program

• Target towards certified socially and economically disadvantaged companies (socially disadvantaged meaning racially and/or ethnically disadvantaged).
• Minority businesses, which must leave the program after nine years.
• Entrepreneurs who participate in the 8(a) Program are eligible for the 7(a) Guaranty Loan and the Pre-Qualification Programs.
• Participants can receive sole-source contracts, up to $4 million for goods and services and $6.5 million for manufacturing. To qualify as economically disadvantaged, a borrower must have a net worth of less than $250,000, assets under $4 million, as well as two years’ worth of tax returns. [7]
• The firm must be at least 51 percent owned by the disadvantaged program applicant and owners must show good character.

Equal Opportunity Loan (EOL)

• EOL Program relaxed the credit and collateral requirements for applicants living below the poverty level
• Encourage new commercial initiatives previously unable to attract financial backing to apply for this loan. [8]

504 Loan Program

• Intended to supply funds for asset purchases (i.e., land or equipment)
• Like the 7(a) program, the 504 program is restricted to small businesses with less than $7 million in tangible net worth and less than $2.5 million in net income. However, since funds from 504 loans can't be used for working capital or inventory, consolidating or repaying debt, or refinancing, this program tends to exclude most service businesses that need to purchase land or equipment. [9]

7(m) Microloan Program

• Intended to provide "small" loans of up to $35,000 that can be used for a broad range of purposes to start and grow a business.
• Start-up friendly. All new businesses are eligible to apply. Although the maximum loan amount is $35,000, the average loan is approximately $10,000. [10]
• Unlike the 7(a) program, the funds to be loaned don't come from banks; rather, they come directly from the SBA and are administered to business owners via nonprofit community-based intermediaries. [11]
• Must concurrently enroll in technical assistance classes administered by the micro-lender intermediaries to be eligible for loan.

Other

• Export Working Capital Program provides short-term working capital to small, export businesses.
• DELTA program provides both financial and technical assistance to help businesses dependent on defense installations transition to civilian markets.

Criticisms

The five most prevalent criticisms of the SBA include [12]:

1. Creates uneven playing field by aiding some businesses while denying aid to others, thus distorting markets;
2. Duplicating activities already provided in private markets;
3. Harms businesses and consumers;
4. Government intervention in deciding market trends can often bet on the wrong companies at taxpayer expense;
5. SBA fosters corruption.

Specifically,

• The Government Accountability Office (GAO) criticized SBA's ability to provide timely disaster assistance to Gulf Coast hurricane victims through their disaster loan system. For more information about this criticism, go to GAO's report on the SBA's disaster relief loans.
• GAO also released Report 10-108 which found that failing to hold firms accountable sent a message to the contracting community that there is no punishment or consequences for committing fraud. See the report for more information.
• The CATO Institute argues that the very conception of the SBA was a bad idea, questioning the federal government's strategy in intervening in the credit market. They say that the United States grew to be an economic powerhouse with a small centralized federal government that largely left business development to the private sector. For more information about the CATO institute's criticism, see this article.