Small Business Administration

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The Small Business Administration (SBA) is a United States government agency that provides support to small businesses.

1 History
2 SBA Loan programs
3 Criticism
4 See also
5 References

[edit] History

The SBA was established on July 30, 1953, by the United States Congress with the passage of the Small Business Act. Its function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Also stipulated was that the SBA should ensure a "fair proportion" of government contracts and sales of surplus property to small business. This was accomplished primarily through the Small Business Innovative Research program and government "set-asides."

The SBA also makes loans directly to businesses and acts as a guarantor on bank loans. In some circumstances it also makes loans to victims of natural disasters, works to get government procurement contracts for small businesses, and assists businesses with management, technical and training issues.

The SBA has directly or indirectly helped nearly 20 million businesses and currently holds a portfolio of roughly 219,000 loans worth more than $45 billion making it the largest single financial backer of businesses in the United States.

The SBA has survived a number of threats to its existence. In 1996 the then newly Republican-controlled House of Representatives planned to eliminate the agency. It survived and went on to receive a record high budget in 2000. Renewed efforts by the Bush Administration to end the SBA loan program have met congressional resistance, although the SBA's budget has been repeatedly cut, and in 2004 certain expenditures were frozen.

[edit] SBA Loan programs

The most visible elements of the administration are the loan programs it administers. The SBA itself does not grant loans. Instead, the SBA guarantees against default certain portions of business loans made by banks and other lenders that conform to its guidelines.

Contrary to popular belief, these programs are not generally for persons with bad credit who can't get bank loans, nor are they primarily used for startup funding; rather, the primary use of the programs are to make loans for longer repayment periods and with looser affordability requirements than normal commercial business loans. Also, a business can qualify for the loan even if the yearly payment would be the same as the previous year's profit, whereas most banks would want payment for a loan to be no more than two-thirds (2/3) of the prior year's profits for a business. The lower payments, longer terms and looser affordability calculations allow some businesses to borrow more money than they could otherwise.

One of the most popular uses of SBA loans is for commercial mortgages on buildings occupied by a small business. These programs are chosen because most bank programs, while having similar payments and rates, require borrowers to refinance every five years.

[edit] Criticism

Businesses applying for SBA loans are supposed to be ineligible for financing elsewhere, as the applicant bank affirms. Designed to avoid direct competition with banks, this provision allows the most promising projects to be funded by the private sector ,leaving higher risk projects to be picked up by the government, resulting in the government holding a higher share of non-performing loans. Though it accepts higher risk, most SBA borrowers pay their loans, the same loans that lenders affirm could not receive credit elsewhere. The Agency has traditionally had a currency rate on its loans of 90% or more, not meaningfully worse than banks.

Others have attacked the SBA as a fount of corporate welfare. Franchisees may receive loans which are then transferred to large corporations such as McDonald's. Despite its expenditures, the SBA aids only 0.4% of the entrepreneurs in the United States, if one includes all manner of home-based businesses like lawn-mowing services or quilting or snow shoveling. However, it is consistently the greatest provider of small business credit in the country; not all small businesses seek credit or counseling every year.

The SBA is also one of very few agencies that pays its own way and does not drain the treasury for its loan programs. Price Waterhouse affirmed, some years ago, that the tax revenue generated by only a handful of SBA startup loans more than paid all the operating expenses for the Agency.

One of the primary uses of SBA funding is for business owners to get a loan to buy the property their business occupies. Owning the property and having the business rent the property from the owner is a form of a tax shelter, so the SBA is criticized for aiding tax shelters. Of course, legally taking advantage of tax law provisions is completely ethical.

Various banks are often criticized for offering or writing fewer SBA loans proportionally than other banks, which critics see as a sign of discrimination. However, others counter that SBA loans are equivalent to or many times worse than what the banks offer themselves, so a customer of that bank might choose the normal bank product more often than their SBA product.

The SBA has most recently been criticized for the manner in which it disbursed loans earmarked for businesses directly affected by the September 11, 2001 attacks. Lax oversight resulted in widespread abuse of the program as the low-interest loans were awarded to unaffected business including "Dunkin' Donuts shops and florists...motorcycle dealers and chiropractors...a South Dakota country radio station, a Virgin Islands perfume shop and a Utah dog boutique," many of them unaware of the special program. ^[1]