From the October 2001 issue of Entrepreneur

People usually complain, loud and long, when a popular government agency is faced with dramatic budget cuts. So what explains the deafening silence after the Bush administration's initial budget slashed funding for the SBA by 40 percent, to $540 million? Small-business-minded senators rode to the rescue, restoring $264 million to a budget resolution in hopes of protecting the 7(a) Loan Guaranty Program and a venture capital program for businesses in economically depressed areas.

Still, some of the dramatic changes survived: Small businesses will pay twice as much-$2,800-in fees for their guaranteed loans, and for the first time, Small Business Development Centers (SBDCs) will start charging entrepreneurs for counseling.

Is much of this news to you? If so, that's because few small-business advocacy groups have been raising much of a stink about the SBA's precarious position. That Bush's budget even targeted the SBA-which, after all, is supposed to represent one of the sacred cows of the U.S. economy and the new American dream-underscores the agency's weak political position.

The new SBA administrator, Hector Barreto Jr., will probably have to defend the agency's very existence. Barreto, a financial planner and vice chairman of the U.S. Hispanic Chamber of Commerce (of which his father was a founder), will be faced with a double whammy: a presidential administration that considers the SBA expendable and a small-business public that doesn't seem to care whether the agency exists or not.

"That there's no outcry when there's talk about cutting the funds is a clear signal to the administration and Congress to change things. It may be time to fold [the SBA] into something else," says William A. Ward, the Warehime Professor of Business Administration at Susquehanna University in Selinsgrove, Pennsylvania. "You could make a case that the SBA has been a victim of its own success. It has been successful in getting a lot of interest and activities started at local and state levels, too." He believes that those activities would carry on even if the SBA ceased to exist.

Public interest in small businesses saw a boom in the go-go 1990s, partly because of the seemingly endless opportunities the Internet opened up and partly because small businesses began to understand and use their clout. Scores of small-business advocacy and membership groups sprang up to advance the interests of various minority groups, regional groups, small-business-within-major-industry groups and so on. Ward contends most of these groups are more committed to promoting their own members' interests than they are to presenting a united front on issues that are pertinent to all small businesses. That's why few of them protested the SBA budget cuts, he says. As entrepreneurship grows, membership in most of these groups also expands, which boosts their clout and undermining any loyalty they have to the SBA.

Meanwhile, the SBA continues to add to its long buffet of programs and services, fueling confusion about its core mission. Ward and others charge the agency has reacted to current business and societal trends by developing a wider spectrum of ever more narrowly focused programs, instead of strategically concentrating on efforts that could lead to long-term gain for small businesses as a whole, such as providing IT assistance and training, and creating new channels for small businesses to trade overseas.

Down but Not Out

It's tempting to throw in the towel and concede that the SBA has outlived its usefulness.

Tempting-but wrong.

The plain fact is there are several compelling reasons to renovate, not junk, the SBA. A high-profile federal government agency provides a solid, steady focal point for small-business issues in a way that disparate nonprofit groups can't. Only a federal agency has the power to create important nationwide programs that can benefit all entrepreneurs, such as channels to enable small businesses to bid on government contracts. The SBA also serves as a valuable advocate for small businesses within the federal government, as it presents issues entrepreneurs care about to Congress, the executive branch and the policy-makers within other agencies.

"We've got to figure out a way to make the SBA more effective," says Scott Hauge, an independent San Francisco insurance agent who has been involved with the SBA at local and national levels. "A lot of small-business people value the advocacy role. You have at least one friend in Washington."

Even critics who would like to see the SBA scaled down and folded into the Department of Commerce concede that the core concept of having a federal office that is the fulcrum for information, advocacy and key programs for small businesses shouldn't be eliminated. The sticking point is determining which information, advocacy efforts and programs really are key to the SBA's reason for being.

Read more about small business and our government:

Then and Now

When the SBA was launched on July 30, 1953, during the Dwight D. Eisenhower administration, nobody anticipated it would become as big-or as controversial-as it is today. (See timeline.) The original impetus for the agency was to make sure small-business owners had a chance to rebuild in the aftermath of World War II. Many big businesses thrived in the wartime economy-some at the expense of smaller competitors. Eisenhower wanted to ensure that small businesses weren't squeezed out of the recovery by advocating for them and ensuring that they got their share of government contracts and sales of surplus property.

The new agency quickly took off. Just a year after it started, it was giving and guaranteeing loans to growing businesses, making disaster loans and setting up training programs. In 1958, the SBA established the Small Business Investment Company (SBIC) Program, which is geared toward providing venture capital. Last year, the program participated in $5.5 billion in investments through commercial lenders and investment firms.

Not surprisingly, in the early 1970s, the SBA edged into programs that advocated social advancement through economic opportunity. Lending and advisory programs targeting aspiring business owners who lived in economically depressed areas started to take root. Today, the agency sponsors targeted outreach, loan and advisory efforts to a vast array of special interest groups, including women, minorities, the disabled, young people, veterans and, in numerous incarnations, economically disadvantaged entrepreneurs.

Slowly, the SBA's role in making and guaranteeing loans evolved. In the 1990s, the agency stopped making direct loans. In the mid-1990s, complaints about the frustratingly long approval process moved the agency to roll out its low-documentation approval (LowDoc) program, which significantly streamlined paperwork and reduced approval time. Last year, the agency participated in 48,000 loans, with 90 percent of those made through its 7(a) Loan Guaranty Program.

With dozens of programs being introduced, changed and phased out over the years, it's not hard to see why the SBA has a murky, undefined image. People aren't sure what good it will be to them and their particular circumstances.

What Can You Do for Me?

Phillip and Arleen Huddleston, co-founders of Exercise Equipment Inc., launched their Reno, Nevada-based business nine years ago. Neither had experience in retailing, wholesaling or as fitness pros. Phillip, an engineer, had discovered a knack for repairing fitness machines; when he saw the demand for his repair services, he was eager to start selling the equipment, too.

The Huddlestons had a vague idea the SBA could help them get money to buy their first inventory. All they needed was $25,000. As it turned out, though, the SBA helped them in an unexpected way-through the advice they got from the SBDC at the University of Nevada in Reno. They researched the market, wrote their business plan and boned up on financial terminology, but got nothing but rejections from banks that wouldn't even consider their application under the SBA's 7(a) program. "I was a white male with no equity," explains Huddleston. "I was totally shot down by the banks. Finally, a new bank opened up in town, and they loaned me the money [through a non-SBA loan]."

Hauge says he isn't surprised to hear about experiences like the Huddlestons'. Somehow, the SBA has let itself be defined by its financial assistance programs-possibly because getting money to start or expand a business is a big problem for business owners. Yet far more people are helped by the SBA's "technical assistance"-programs that aid entrepreneurs with all sorts of nuts-and-bolts aspects of running their companies, from setting up Web sites to learning how to bid for government contracts. An overwhelming majority of the people served by the SBA receive this type of assistance, Hauge reports. "It's Business 101 on a need-to-know basis," he says. About half the businesses served by SBDCs are start-ups, even though, Hauge says, the centers' official mission is to primarily serve ongoing businesses.

Even leaders of special interest groups say they rely on the SBA to promote their members' concerns. "The SBA keeps an eye on the rest of the government to make sure certain [federal] purchasing programs include small businesses," says Susan Bari of the Women's Business Enterprise National Council. "There are supposed to be set-asides for small businesses, but I don't think a lot of government agencies would pay attention to these if the SBA wasn't looking over their shoulders."

Some experts believe that if the SBA would take a hard look at what it does, compared to what other federal agencies and nonprofits do, it could probably hand off numerous programs and free up resources for the programs it's determined only it can do. The SBA could greatly help itself by simply analyzing which programs serve the most people the most cost-effectively and deliver the greatest return on investment, says Charles Fitzpatrick, a former SBDC director and current director of the LaBelle Entrepreneurial Center at Central Michigan University in Mt. Pleasant, Michigan.

"A lot of [membership] organizations are all about advocacy and don't provide business plan and start-up help like the SBDCs," Fitzpatrick explains. "Really, other than the SBDCs, there is no place to go for that, save for the occasional [local] economic development office. But even [they] won't sit there and walk someone through filling out forms."

SBA-watchers say the agency needs to do a better job of stripping out functions that are redundant with advocacy groups and those that are becoming irrelevant. "The SBA doesn't [advertise its] performance data," says Ward. "It's too broad-brush. There's a need to restructure and retrench the SBA and reallocate its resources."

For instance, as a result of the SBA's efforts to streamline the guaranteed loan program, its requirements have become virtually synonymous with traditional bank lending practices. The two are so close that it might make sense for the SBA to eliminate the guaranteed loan program-which, in most regions, has a default rate only slightly higher than that of commercial lenders anyway, says Mike Kiser, a retired SBA district director who now is president of the Milwaukee branch of Wisconsin Business Bank, an SBA lender. Banks already have requirements to invest in economically disadvantaged neighborhoods, which could resolve the need for many of the SBA's specialized loan programs.

Hauge says he's "always hopeful that changes will happen." The confirmation of Barreto as SBA administrator is a positive sign: He's at least a small-business owner with experience at spearheading small-business issues. Says Hauge, "That's a step forward from the past."

Curious about the programs featured in this article? Find out for yourself what the SBA is offering entrepreneurs:

The SBA Timeline

1932: Herbert Hoover's Reconstruction Finance Corp. (RFC) made loans to businesses of all sizes undermined by the Depression and World War II. Adopted by Hoover's successor, Franklin D. Roosevelt.


1942: To protect the nation's supply chain during wartime production, Congress created the Smaller War Plants Corp. (SWPC). It made direct loans, encouraged commercial lenders to make credit available to small businesses, and advocated for small businesses with federal agencies and bigger businesses.

1946: SWPC disbanded when the war ended, and its functions folded into the RFC. Department of Commerce started some educational and training functions previously handled by the SWPC. RFC continued to oversee government loans.

1952: President Dwight D. Eisenhower proposed sweeping all the small-business services into a new agency: the Small Business Administration.

1953: SBA born on July 30, 1953 by an act of Congress. Its mission is to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." SBA would also ensure small businesses a "fair proportion" of government contracts and sales of surplus property.

1954: SBA starts making direct loans, guaranteeing commercial loans, lending to victims of natural disasters, advocating for small businesses with other federal agencies, and establishing management, technical assistance and training programs.

1958: Small Business Investment Company (SBIC) loan Program created to aid high-risk small-business start-ups and fast-growth companies.

1964: Equal Opportunity Loan Program was designed to give assistance to aspiring business owners with incomes below the poverty level.



1988: Women's Network for Entrepreneurial Training is launched. It has since evolved to become the Women's Business Center.

1995: LowDoc process introduced to eliminate some of the burdensome paperwork that was then required for the 7(a) Loan Guaranty Program.

1996: ACE-Net-the Angel Capital Electronic Network-is formed to help make connections between early-stage companies and investors.



1998: BusinessLINC is created to match small businesses with larger companies that can provide mentoring for them.

1999: SBA starts packaging loans in its 7(a) Loan Guaranty Program to be available for sale on the commercial secondary loan market.




Joanne Y. Cleaver regularly writes for a number of magazines and has written two books on marketing in her 20 years covering small business.
Cynthia E. Griffin contributed to this article.

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