Spotlight: SBA

SBA“The chief business of the American people is business,” said President Calvin Coolidge, speaking before a convention of newspaper editors 90 years ago. (His bon mot is often shortened to “the business of America is business.”) But just what kind of business? Coolidge, after all, made his remark in the golden age of the American corporation, the rising era of IBM, Boeing, General Motors, Columbia Broadcasting Service, and other huge firms across the economy. Then as now, small companies accounted for as much economic activity overall as large ones, but the prevailing assumption was that the corporations would eventually dominate—an idea enshrined in James Burnham’s highly influential book The Managerial Revolution, published just after the dust of the Great Depression had settled.

Enter the federal government, some of whose leaders worried that because of the economic concentration brought on by World War II, small businesses—defined as those with fewer than 500 employees—did not have a fair chance against their corporate competitors, especially when it came to securing loans to launch new enterprises that, if encouraged, would yield a flourishing economy. Established by law on July 30, 1953, in the early months of Dwight D. Eisenhower’s first term as president, the Small Business Administration had as its stated mission “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses.” A secondary part of the mission statement of the SBA adds “by assisting in the economic recovery of communities after disasters,” an important but often overlooked role, but its primary purpose has since been defined as encouraging small business and entrepreneurship by guaranteeing private loans in the event of default or bankruptcy.

The SBA has effected this encouragement in numerous ways. It has been a pioneer in loans to minority-owned businesses, opening, for instance, more than a hundred Women’s Business Centers across the country, establishing Internet portals for entrepreneurial resources and guidance, and developing a program of microloans of up to $50,000 for eligible applicants. It has recently given priority to helping military veterans establish businesses, while—of particular interest to our readers—it has operated its 504 Fixed Asset Financing Program, providing funding of up to $5.5 million for the purchase or construction of real estate or the purchase of business equipment and machinery. The program has provided a clearinghouse for the sale and purchase of real properties, especially in higher risk areas such as inner-city districts undergoing redevelopment.

The most notable role of the SBA–to federal lessors, at least–is that it reviews and approves the Small Business Subcontracting Plans required in lease transactions involving lessors that are categorized as large business.  In those lease contracts where the federal contractor (i.e. lessor) is a large business, goals must be established for subcontracting a certain portion of the lease related construction and property operations to small businesses. SBA further establishes the size standards that differentiate between “big” and “small” in all business categories.

The SBA has never been widely popular in the larger business community. From the outset, organizations such as the US Chamber of Commerce and the American Bankers Association opposed its creation, protesting that the government had no proper place in the lending business. It was slated for elimination under several administrations, including those of Ronald Reagan and George W. Bush, but saved by congressional intervention—interestingly, spearheaded by the commerce committees of both houses.

Calls to abolish the agency continue today, with critics of the SBA, among them the CATO Institute, arguing that its chief assumption is outmoded, namely that small businesses have unfairly limited access to credit as compared to larger ones. Those critics add that an unintended irony is that SBA-certified banks, which buy and sell risk-free loans guaranteed by the government, are more often than not the largest financial players on the block. Finally, given looser underwriting requirements than in the normal lending sphere and our recent history with the consequences of bad loan risks in the Great Recession, to say nothing of episodes of outright fraud, even supporters of the agency have called for greater oversight.

With fewer than 2,400 employees, headquartered in Washington but widely distributed in branch offices, at least one in each state, the SBA has a relatively small footprint. The outstanding loan guarantees it holds, amounting to about $100 billion, give it an outsize importance, however, which may explain why President Barack Obama elevated the SBA to the Cabinet level. Confirmed by the Senate, SBA Administrator Karen Mills thus enjoys even greater influence than her predecessors in office.