The Small Business Administration (SBA) is an independent federal agency that helps small businesses in the United States. The administration provides aid, usually in the form of loans, and counseling to assist and protect the interests of small business concerns. The SBA helps Americans start, build, and grow businesses all across the country and in U.S. territories, such as Puerto Rico, the Virgin Islands, and Guam. But the agency hasn’t always accomplished its mission. It has been repeatedly criticized for responding slowly to the needs of small business owners, especially in the wake of disasters.
Before the SBA, there was the Reconstruction Finance Corporation (RFC), created by President Herbert Hoover in 1932 to help mitigate the financial crisis of the Great Depression. The RFC was a federal lending program for all businesses hurt by the Depression.
Concern for small business intensified during World War II, when large industries beefed up production to accommodate wartime defense contracts and smaller businesses were left unable to compete. To help small business participate in war production and stay afloat, Congress created the Smaller War Plants Corporation (SWPC) in 1942. The SWPC provided direct loans to private entrepreneurs, encouraged large financial institutions to make credit available to small enterprises, and advocated small business interests to federal procurement agencies and big businesses.
The SWPC was dissolved after the war, and its lending and contract powers were handed over to the RFC. Also, the Office of Small Business (OSB) in the Department of Commerce assumed some responsibilities that would later become characteristic duties of the SBA. Its services were primarily educational. Believing that a lack of information and expertise was the main cause of small business failure, the OSB produced brochures and conducted management counseling for individual entrepreneurs.
During the Korean War (1950-1953), Congress created another wartime organization to handle small business concerns—the Small Defense Plants Administration (SDPA). Its functions were similar to those of the SWPC, except that ultimate lending authority was retained by the RFC. The SDPA certified small businesses to the RFC when it had determined the businesses to be competent to perform the work of government contracts.
By 1952, a move was on to abolish the RFC. To continue the important functions of the earlier agencies, President Dwight Eisenhower proposed creation of a new small business agency: the Small Business Administration (SBA), established by the Small Business Act of July 30, 1953. Its function was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” The charter also stipulated that the SBA would ensure small businesses a “fair proportion” of government contracts and sales of surplus property.
By 1954, the SBA already was making direct business loans and guaranteeing bank loans to small businesses, as well as making loans to victims of natural disasters, working to get government procurement contracts for small businesses and helping business owners with management and technical assistance and business training.
The Investment Company Act of 1958 established the Small Business Investment Company (SBIC) Program, under which SBA licensed, regulated, and helped provide funds for privately owned and operated venture capital investment firms. The program specialized 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 small businesses could not get the credit needed to keep pace with technological advancement.
During the Lyndon Johnson administration, the SBA began to attack poverty through the Equal Opportunity Loan (EOL) Program. The EOL Program relaxed the credit and collateral requirements for applicants living below the poverty level in an effort to encourage new businesses that had been unable to attract financial backing.
Nearly 20 million small businesses have received direct or indirect help from SBA programs since 1953. Its current business loan portfolio of roughly 219,000 loans worth more than $45 billion makes it the largest single financial backer of American businesses in the nation.
In September 2010, President Barack Obama signed into law the Small Business Jobs Act which, among other things, extended the SBA enhanced loan provisions to more than $12 billion, increased loan limits by more than $5 million, and offered billions of dollars more in tax cuts and other lending support.
In October 2010, the SBA launched a Women-Owned Small Business (WOSB) Federal Contract Program, designed to expand federal contracting opportunities for women-owned small businesses. In February 2011, the agency opened 83 industry categories to federal procurement contract set-asides for both WOSBs and Economically Disadvantaged Women-Owned Small Businesses (EDWOSBs).
The SBA provides loans and other assistance to owners of small businesses. The agency seeks to help both existing small businesses and new ones trying to get started. Help is available to all small business owners, including minorities and women. Programs run by the SBA include:
Technical Assistance (Training & Counseling)
From the SBA Web Site:
The SBA spent more than $744.6 million on more than 7,000 contractor transactions this decade. According to USASpending.gov, the SBA paid for a variety of services, from miscellaneous professional services ($191,306,635) and automatic data processing ($49,022,929) to auditing ($32,304,289), automated information system designs ($29,056,500), and computer-aided design and manufacturing ($27,464,005).
The top five contractors were:
1. Unisys Corporation $41,114,971
2. SRA International Inc. $31,051,274
3. Washington Products and Services Inc. $30,718,807
4. Northern Taiga Ventures Inc. $19,914,006
5. Ahmad Associates Limited Corporation $18,775,841
Unisys Corporation, the SBA’s largest contractor, is a company specializing in data storage and protection. In recent years, their work has expanded to include communication technologies, financial services, and transportation SRA International, the SBA’s second largest contractor, is a professional society of research administrators whose 4,000 members are employed at hospitals, universities, nonprofits, and in the federal government.
SBA Contract Oversight Is Lacking
Too often ineligible companies have benefited from programs run by the Small Business Administration, prompting Congress to try and remedy the problem.
A bipartisan group of U.S. senators introduced legislation in 2011 to create a more effective oversight structure for SBA’s entire contracting system. The Small Business Contracting Fraud Prevention Act was designed to address everything from the certifying the eligibility of companies applying for SBA help to conducting follow-up monitoring after awards are given out.
Lawmakers also included tougher criminal penalties for businesses that fraudulently win small business contracts. Additionally, violators would risk disbarment from receiving government contracts and be forced to pay back monies received from the SBA.
The Senate adopted the legislation, which was awaiting action in the House as of 2012.
By then lawmakers were still complaining about SBA’s poor oversight. The criticism was prompted by a Bloomberg investigation that uncovered wealthy entrepreneurs who had received hundreds of millions of dollars in federal contracts reserved for disadvantaged business owners.
One example featured a Florida family that earned $256 million in federal contracts over two decades by somehow remaining 18 years in a nine-year program intended for struggling entrepreneurs.
Bill Would Toughen Oversight of SBA Contracting Programs (by Robert Brodsky, Government Executive)
Lawmakers Demand Crackdown on U.S. Program Enriching Wealthy (by Danielle Ivory, Elliot Blair Smith and Gopal Ratnam, Bloomberg News)
SBA Needs to Strengthen Oversight of Its Loan Management and Accounting System Modernization (Government Accountability Office)
SBA Needs to Strengthen Oversight of Its Loan Management and Accounting System Modernization (House Committee on Small Business)
HR 4206: “Contracting Oversight for Small Business Jobs Act of 2012” (Government Printing Office) (pdf)
Waste and Fraud Mires SBA
The Small Business Administration (SBA) wastes money on programs that perform similar functions to those in other agencies, and does not do enough to root out fraud, reinforcing its reputation as the “Small Scandal Administration,” according to complaints in 2011.
A report from the Government Accountability Office (GAO) found 80 economic development programs at four agencies that overlapped with each other. The SBA administered 19 such programs, but was not consistent in collaborating with other agencies to avoid duplication of efforts.
The report also noted that the SBA has “had varying degrees of internal control weaknesses that affected program oversight.” This included not sufficiently certifying and monitoring firms receiving assistance to make sure they were eligible.
Later that year, Senator Olympia Snowe (R-Maine) complained during a hearing on SBA’s work that it did not employ consistent standards and proper training in enforcement activity. Snowe said the agency reviewed less than 1% of all small business contracts to minimize fraud.
Small Business Programs: Efforts to Address Internal Control Weaknesses and Potential Duplication (Government Accountability Office)
SBA Fraud Hearing Discusses Loan Agent Abuses, Enforcement, Set Asides, Agency Abolition (by Anthony Critelli, GovWin)
Waste, Fraud, and Abuse in Small Business Administration Programs (by Tad DeHaven, Cato Institute)
SBA Regulations Don’t Cost As Much As Claimed
The Small Business Administration issued a study claiming government regulations had cost the U.S. economy $1.75 trillion in 2008, provoking accusations that the researchers relied on flawed methodology.
One critic of the study, the Center for Progressive Reform (CPR), noted in its own report that conservatives had utilized the $1.75 trillion number to argue for rolling back regulatory protections.
Sidney Shapiro, coauthor of the CPR report, said: “The SBA report makes no effort to account for the benefits of regulation, even though benefits typically exceed the costs. In addition, more than 70% of the SBA figure is based on public opinion polling about the regulatory climate in different countries, numbers that were never meant to be spun off into an absurd guess about the total effect on the U.S. economy.”
Another critic of the SBA study, the Congressional Research Service, said questions had been raised “about the validity and reliability of this estimate.” Using more appropriate data, the estimated cost of regulations would have been cut by almost two-thirds.
Still another source pointed out that a 2009 report from the Office of Management and Budget estimated total regulatory costs in the previous year ranged from $62 billion to $73 billion, while at the same time, they produced $153 billion to $806 billion in benefits for the economy.
SBA Study Claiming $1.75 Trillion Cost of Regulations Was Based on Series of Significantly Flawed Calculations, Says CPR Report (Center for Progressive Reform) (pdf)
Federal Regulations: Are American Businesses Unduly Burdened? (by Amy Bingham, ABC News Blogs)
Analysis of an Estimate of the Total Costs of Federal Regulations (Congressional Research Service)
Large Corporations Receiving Federal Contracts Meant for Small Businesses
In 2004, the Washington Business Journal reported that the SBA had been urged to define “small” a bit more clearly, in order to more fairly award loans and contracts. Thousands of companies had complained to the SBA about a proposed rule that would use only a firm’s number of employees to determine whether it is eligible for SBA contracts or other programs. Traditionally, the number of employees and annual revenue were used to make this determination.
In 2005, Inc. magazine reported that large corporations like General Dynamics, Lockheed Martin, and L-3 Communications received small business contracts from the SBA. Almost $80 billion, or 25.4% of total federal contracting, went to small business. But the Center for Public Integrity released a report saying that at least 20% of all SBA contracts go to the nation’s largest defense contractors. On July 30, 2008, the Bush administration modified policy to make it easier for large firms to qualify as “small businesses” by dropping the requirement that government contractors publicly state either their number of employees or their annual revenue. In 2007, Congressman Jason Altmire (D-Pennsylvania) introduced legislation that would have changed the definition of a small business to include those majority owned and controlled by billionaire venture capitalists. The bill didn’t pass, and Altmire tried again and failed in 2009. In 2011, the SBA announced a proposal to change its definition of “small business” to include larger companies, thereby allowing 9,450 additional businesses to become eligible for a federal small business contract.
New Bush Administration Policy Helps Large Businesses Masquerade as Small Businesses (American Small Business League)
Small Business, Big Controversy: Why are so many big corporations winning federal contracts designated for small firms? (by Robb Mandelbaum, Inc.com)
SBA to let larger companies win small-biz contracts (by Sarah Chacko, Federal Times)
Pennsylvania Representative Jason Altmire Named "Most Anti-Small Business Congressman" (by Lloyd Chapman, Huffington Post)
SBA Ruling Questioned in Blackwater Investigation
In November of 2007, Rep. Henry Waxman (D-California) raised questions about whether Blackwater, a controversial private security firm, was evading U.S. taxes by classifying its armed guards as independent contractors instead of employees. Although the IRS had ruled that Blackwater’s classification of security guards as independent contractors was “without merit,” Blackwater cited an SBA “official finding” that “Blackwater security contractors are not employees.” Blackwater avoided paying $31.8 million in payroll taxes.
SBA ruling comes up in Blackwater investigation (by Kent Hoover, Washington Business Journal)
Low Morale and Incompetence
In July 2006, Fortune magazine reported that during Hector Barreto’s six-year run as chairman of the SBA, the agency came under repeated attack for its slow and bungling response to Hurricane Katrina and for managing a team of employees with the lowest morale in the federal government. Some have begun to call for ending the agency altogether, since it helps less than 1% of all small businesses in the country.
Hurricane Katrina Controversy
In the wake of 2005’s Hurricane Katrina, the SBA was responsible for helping small businesspeople get back on their feet with loans and other services. But 18 months after the hurricane devastated New Orleans, few local small businesses had been helped either with loans or federal contracts. Mountains of paperwork, non-transparent application processes and unhelpful staff were just a few of the complaints lodged against the agency. Only about 7% of the available contracts went to local companies. Minority-owned business fared worse, winning only 4% of government contracts. A 2007 report issued by the General Accountability Office stated that poor planning on the part of the SBA resulted in costly delays in helping small business owners in the hurricane’s aftermath. It also criticized the SBA for not providing enough trained employees to process the massive amount of disaster loan applications. The GAO produced another report in 2010—SBA: Continued Attention Needed to Address Reforms to the Disaster Loan Program (pdf)—that outlined recommended reforms. On the sixth anniversary of the disaster, citizens of New Orleans complain that the recovery hasn’t moved faster, and they continue to call for more support for struggling small businesses and the rebuilding of neighborhoods.
The Katrina Controversy (by Renuka Rayasam, U.S. News & World Report)
Hurricane Katrina's 6th anniversary brings second lines, speeches, support (by John Pope, The Times Picayune)
The Small Business Administration’s Office of Advocacy has issued a top 10 list (pdf) of federal regulations affecting small businesses that should be reviewed and possibly reformed. For 2008, after analyzing 82 nominations, the Chief Counsel for Advocacy selected the following nominations:
Environmental Protection Agency (EPA)
EPA should revise outdated or inaccurate testing requirements so that modern dry cleaners can have a valid method for demonstrating compliance.
Environmental Protection Agency (EPA)
EPA should consider expanding the ways for small communities to qualify to meet alternative drinking water standards, provided that the alternative standards are protective of human health and are approved by state authorities.
Environmental Protection Agency (EPA)
EPA should simplify the rules for recycling useful materials that, because of their current classification, must be handled, transported and disposed of as hazardous wastes.
Environmental Protection Agency (EPA)
EPA should clarify the definition of “oil” in its oil spill program, so that small facilities that store nonpetroleum-based products are not unintentionally roped in by spill program requirements.
Federal Aviation Administration (FAA)
FAA and other agencies should review the flight restriction rule for the region surrounding Washington D.C., to determine whether the rule could be revised to avoid harming small airports within the region.
Federal Acquisition Regulation Council (FAR Council)
The duplicative retainage requirement should be removed or reduced in architect-engineering services contracts, as has been done for other services.
Internal Revenue Service (IRS)
The IRS should revise their rules to permit a standard deduction for home-based businesses, which constitute 53% of all small businesses.
Mine Safety and Health Administration (MSHA)
MSHA should update its current rules to be consistent with modern mining industry explosives standards.
Occupational Safety and Health Administration (OSHA)
The current rule should be reviewed to determine whether it can be made more flexible in situations where workers do not have potential exposure to blood-borne pathogens.
Office of Federal Procurement Policy (OFPP), Office of Management and Budget
The current reverse auction techniques should be reviewed to determine whether a government-wide rule is necessary to create a more consistent and predictable online process.
Of 38 nominations in 2009, two new rules were chosen for review and reform: Remove the “Foreign Exemption” from Federal Contracting (the Federal Acquisition Regulation Council [FAR] should remove the “foreign exemption” from federal procurement policy, increasing federal agencies’ incentive to award government contracts to small and disadvantaged businesses seeking to work outside of the U.S.) and Eliminate Duplicative Background Checks for Commercial Truck Drivers (the Transportation Security Administration [TSA] should eliminate the current requirement that a commercial truck driver who holds a valid TWIC must undergo a duplicative security background check when they apply for a hazardous materials endorsement). Eight of the rules from 2008 were retained for 2009, while these two were removed due to successful reform by federal agencies: the EPA’s Definition of Solid Waste and the FAA’s Flight Rules for the Washington D.C. Area.
Keep It, or Kill It?
In June 2007, Business Week magazine devoted its Debate Room feature to the issue of whether the Small Business Administration has outlived its usefulness. The feature remarked, “The Small Business Administration is of little value. It gives loans to non-creditworthy businesses, shifting funds away from larger enterprises deserving of credit. Pro or con?”
Pro: Gratuitous Crutch
According to Veronique de Rugy of George Mason University’s Mercatus Center, Congress created the Small Business Administration in 1953 to fix an ostensible problem: Lenders passed over large numbers of small businesses that, if given access to a loan, would generate untapped economic growth. In fiscal year 2011, the SBA guaranteed nearly $24 billion in loans, mainly through its flagship 7(a) loan program for businesses with special requirements. Plenty of evidence indicates, however, that the time has come for Congress to abolish the SBA loan programs. Here are three reasons.
First, academic literature shows that private capital markets already efficiently allocate loans to small businesses. Banks give credit at the right price to companies that deserve it at that price, including small businesses.
Empirical studies prove that point, too. In 2002, the Federal Reserve Board reported that the demand for small-business financing closely tracked the pattern of debt growth from 1997 to 2002, suggesting a correlation between the demand and supply of financing. Although conditions deteriorated substantially in 2001 and the beginning of 2002, small businesses didn’t find financing conditions onerous and weren’t suddenly having more difficulty obtaining credit during that period.
Second, shutting down the SBA would hardly stop small businesses from getting loans. According to the GAO, slightly more than 1% of small businesses receiving loans (long- or short-term) in a given year receive them from the SBA. And while 22% of Job Acts loans go to minority business owners, SBA distributes loans to roughly only 3% of all minority-owned firms. The same trend is true for women-owned firms, which receive 16% of Job Acts loans. In other words, the SBA is largely irrelevant in the capital market. Even the National Federation of Independent Business, the chief small-business lobbying group, agrees. “Our members tend not to rely on SBA loan programs,” said Andrew Langer, who served as the NFIB’S manager of regulatory policy.
Finally, even though SBA loans tend to flow to riskier borrowers—as its mission intended—it’s unlikely that these businesses promote economic growth. SBA loans go to businesses that conventional providers of financing have rejected. This means these loans go to the enterprises least likely to create stable employment, improve technology, or enhance national productivity. Default rates on SBA loans were 11.92% in 2009, as opposed to 1.1% for high-yield government bonds and 11.37% for credit card loans (2010).
It is time to abolish the SBA loan programs.
Terminating the Small Business Administration (by Veronique de Rugy and Tad DeHaven, CATO Institute)
Terminate the Small Business Administration (by Tad DeHaven, Washington Examiner)
Con: A Crucial Helping Hand
According to Kristie Darien of the National Association for the Self-Employed, abolishing the SBA would not only hurt small business by shutting down key programming that aids in business development and growth, but would also ultimately strike at the foundation of our nation’s economy. Programs offered by the SBA have a proven track record of effectively aiding very small businesses and our nation’s self-employed.
Owners of small businesses continue to face considerable challenges in starting and enhancing their enterprises. One key obstacle is their ability to attain funding. According to an online survey by the National Association for the Self-Employed (NASE), nearly 60% of self-employed individuals say they have been forced to rely on personal finances as their primary source of funding when starting their business. That habit continues after the business is established, with 36% continuing to use personal savings as an ongoing means of finance. Big business, on the other hand, is rife with players who could afford to invest their private stashes—but rarely do. Why must the entrepreneur bear the heavier burden?
Historically, traditional lending sources such as banks and other financial institutions have not met the funding needs of micro-business owners. The self-employed and micro-business communities generally need small infusions of capital over their lifetimes. The small scale of the loans needed by micro-businesses as well as lending institutions’ perceptions that startups and small enterprises are risky investments have led to a lack of capital resources.
SBA loans, such as those available from the Micro-Loan Program, fill this funding gap. Access to SBA Micro-Loans is an important avenue to help businesses grow and boost the local economies.
In addition to financing, SBA offers training programs, such as those provided by Small Business Development Centers, which give essential, one-on-one assistance to current and prospective entrepreneurs. The centers support entrepreneurs throughout every stage of their business’s creation and growth. And the SBA Office of Advocacy has long served as a strong voice within government to ensure that small business gets a fair shake in the regulatory process.
Axe the SBA (debate, Business Week)
SBA-Backed Loans Are Bright Spot in Gloomy Climate (by Emily Maltby, Wall Street Journal)
Steven Preston (July 2006 to June 2008)
Steven Preston graduated from Northwestern University with a political science degree and received an MBA from the University of Chicago’s Graduate School of Business. He also studied at the Ludwig-Maximilians-Universität in Munich, Germany.
Preston served as an investment banker at Lehman Brothers, followed by his work as a senior vice president and treasurer of First Data Corporation. He then moved on to being executive vice president of The ServiceMaster Company, where he also served as chief financial officer.
In April 2008, President Bush nominated Preston to become the Secretary of the Department of Housing and Urban Development (HUD). He was confirmed in June.