The SBA quagmire: Rebuilding a ravaged agency
Obama has promised to be a champion of small business. To succeed, he'll need to radically overhaul the Small Business Administration. What do you think the SBA should do next to help small companies?
From Anonymous Help! We need low cost loans so we can buy equipment. This in turn will put people to work in factory's It's call ( Thinking out side the BOX).Inventory
I planned on making a purchase. I talk with my banker about a loan it's like Loan are you crazy
From Pat Conroy, Austin, Texas A major problem for small businesses is lack of working capital. The only answer the feds have is to make loans available through the SBA. That won’t help. The last thing I want to do is borrow money because I have to sign personally for business loans. I would rather cut expenses and my number one expense is payroll.
The answer is for the feds to stop taxing small business working capital. That would save hundreds of thousands of jobs. Only tax me on what I take out of my company in salary and dividends. That would ensure that I could build up working capital in good times so that I wouldn’t have to lay off employees in bad times.
From Nick Pasq, Daytona, FL We have dealt with SBA on 2 occassions. Once when we bought the business and once after a disaster. In the first instance we found the paperwork and bank ripoff rates so overwelming we decided to go with owner financing and gave up on the SBA. In the diaster situation we again found it VERY difficult to get through the red tape. We finally drove to Atlanta, met a Mgr., and got it done. For the most part we found that the SBA is staffed with people that have little or no business background and like most Gov't agencies it seems to be nothing but a dumping ground to fill quotas.
The SBA needs to get some business savy people and start concentrating on getting business going that creates jobs instead of weird gift shops and hot dog stands. It is time to stop worrying about quotas, minority ownership, and start looking for people who have the savy to start, run and build a business and get them operational. They need to protect business start-ups from greedy banks while they also need to break even on costs. Something Obama sure does not know how to do as he has no business savy. Let's hope his appointee can get'er done, but I sure am not holding my breath. After running this business for over 14 years any expansion plans we have are on hold under this Administration and it's tax plans for small business. Meanwhile I have to subsidize walmart with my taxes? What's with that?
From Frank Ballesteros Tucson, Az Home-based and "Micro" businesses are the engines that run rural communities. These home-based and smaller businesses can receive loans of up to $35,000 from a program out of the SBA. The Microenterprise Development Project is a strategy that started with the Clinton Administration. The SBA should look into the impacts this program has had in the last nine years. The SBA should consider funding this program because if there is going to be job creation in this country, micro and small enterprises throughout this country will create them. The SBA Microloan Project is a note worthy strategy that should get the full attention on the new SBA Administrator. The Association for Enterprise Opportunity (AEO) is the national trade association that works with over 700 microloan development projects in this country. This organization helps the SBA Intermediaries(Micro lenders) to strengthen their technical assistance. The SBA Administrator should (1) acknowledge the SBA Microloan Division (2) Support this Division by staffing it with good personnel; (3) Make sure Congress supports it to the maximum.
If the Administration is serious about job creation, the Microenterprise Development Project within the SBA is the engine that will empower this great country once again!
From John, Syracuse, NY When we were granted a SBA backe loan three years ago the interest was 9.75%. Now with a drop in the prime rate small businesses should be able to refinane their loans.
From Citizen,Scarborough,Maine USA – It is the fabric of who we are the strength and beauty of combining both big business and small business that work in harmony. Now is the time to strengthen this relationship again. Maine st. and Wall st. need each other.
Granted technology has changed the playing field but the fundametals are the same, Seed money is needed for creativity to grow. What we need to do is treat this situation like after the world wars. The redirection of Taxpayers money in helping to create cheaper education loans,cheaper housing loans, small town banks willing to lend for loans that have a good common sense business plan. It's not rocket science we have been here before. History repeats it self,how soon we forget.
From Dave, Grand Rapids, MI On your title – SBA being a ravaged agency: SBA has been trimmed down over time, and in some cases they could use more staff. However, I've been working with SBA exclusively for the past 15 years, and have never found the agency more responsive and user-friendly for lenders than it is today. By this, I mean it's user-friendly for banks who know how to use the program. The 'ravaging' of this agency has caused it to become a 'zero-subsidy' program in the US government. That's a program that essentially doesn't cost the taxpayer anything to run. Wouldn't we love to say this about more government programs?? I would! The SBA doesn't need BIG tweaks, it just needs little ones, starting with a fixing of the rate caps. However, I would also applaud a cabinet level post for this agency which is supposed to represent a growing portion of the economy in this country – small businesses. If the SBA needs fixing, why not ask the folks who have worked with it for the past many years to help (like me)? That just seems to make sense. I'll offer Ms. Mills 2 weeks of my time annually to help 'fix' the agency if she wants it. For free.
From Dave, Grand Rapids, MI SBA needs to fix only one thing currently – it's rate caps. They are what killed the secondary market and caused the exit of many banks from SBA lending over the last year. The wonderful thing about this change is that it would cost you and I (taxpayers) nothing! Rate caps don't need to be lifted forever, but just until the current credit crisis we're in fixes itself. Artificial rate caps like the ones used by SBA actually are causing the credit crunch to linger longer than it should. Banks aren't allowed to charge a higher rate than Prime plus 2.75% (currently 6%) to their 'weaker' customers who need SBA backed financing. This is while they're lending their regularly customers money in the 7's and 8's! No wonder banks are lining up to do SBA lending. If the rate cap was lifted, SBA loan usage would soar, as lenders were allowed to let the market set the rate for any individual transaction. What's happening now? Lenders won't lend to credit worthy borrowers because they can't make enough money on SBA loans to compensate them for the risks involved in lending to the typical SBA borrower. And I should know, as I've worked with SBA lending exclusively for the past 15 years. If Ms. Mills wants to fix SBA, start off with lifting (temporarily) these rate caps (and yes, I mean the LIBOR one too).
From Loan Officer, Charlotte, NC RFS – You need to find another bank to work with. The requirements and fees you are being charged come from them, not the SBA. The bank does all the paperwork for the SBA. Yes, you have to provide some data to them, but they do it. The bank you are working with is jerking you around. They are telling you they don't want to do the loan without coming out and saying so. Find another bank that does SBA loans.
From Loan Officer, Charlotte, NC Barry – The 80% collateral requirement you quote must be from the bank itself. SBA loans are designed to address collateral — they guarantee the loan to the bank. The SBA Express Loan Program, for example, requires no collateral at all. If a would-be entrepreneur has assets they have to put them up. Why should the government be the only one taking a risk on a new business? Without this requirement everyone would start a business and the cost to the taxpayers would be astronomical.
From Reggie, Gary, IN The SBA is a quaqmire group which is a typical goverment agency – lots or red tape and regulations but little action. Only a select few can receive loans due to the arduous process which isnt any less stringent than a typical bank loan process. In essence most of us "real" small business owners are not helped at all by the SBA – we just overlook it because it is mostly talk which requires to much time and effort for minor benefits.
From SBA Insider, CA The SBA has a noble purpose and a cadre of some real dedicated professionals committed to the Agency's mission and who do some pretty spectacular- even if unnoticed- things on behalf of the nations small businesses. The problem with the SBA is that the Agency's political leadreship has traditionally been too fluid. Often times, many political appointees see their time in the SBA as a way station until another job in a more "visible" Agency comes about. As a result, you have ever-evolving agendas put in place by essentially what are short timers who have no stake or true interest in seeing things thru to fruition. As soon as a new politico comes in, it's "stop that, and let's do this." That is not only counterproductive but is a morale buster to the professional, career staff who see their efforts for the past 6-12 months for naught. My advice to the Administration would be: name appointees who understand not only the needs of small business but the SBA itself; listen and value the opinions of the career staff who have been thru numerous transitions and understand why certain programs and procedures are what they are and want to give good advice and ideas on how to improve programs; name appointees who are commited to small business and content to be part of the SBA's mission.
From Dave, Grand Rapids, MI Leo, I got so carried away with my first comment, I forgot to address the disaster loan program. Obama's campaign trail rhetoric about wanting to do more 'distaster loan type financing' was hopefully just that – rhetoric. The government has a woeful record of lending directly to small businesses. Today, the SBA's flagship program, 7a, works well when properly implemented. SBA's track record of dealing directly with borrowers is so bad, they completely abandoned their direct lending programs years ago. Now they only do this in emergency situations. Please look at their track record in New Orleans. While they might have gotten the money out 'quickly' there, it was necessary as there was likely not a functioning banking system at the time. When there is a functioning banking system, the 7a program has worked well to finance small business. Direct lending programs from SBA have also had dismal repayment rates and liquidation success over the years. SBA works well as a guarantying agency for small commercial debt, and that's how they need to be used and promoted. Direct lending would likely again be a dismal failure. And, as I mentioned in my other comments, lifting the rate cap temporarily would fix the 'SBA credit crunch' that is currently going on anyway. Let the market work on this one, and we'll all be amazed at how quickly SBA loans increase in volume! It's a crystal ball prediction from my Econ 101 class…
From Dave, Grand Rapids, MI Leo, nothing against you, but I'm entirely sick of articles coming out about the SBA that are completely one sided or uninformed, and this one is both. Let's discect your article:
First, SBA loans are down because small business lending across the board is down for 2008 – way down! Many banks simply stopped lending to small businesses this year, and some are still not lending, although many have gotten back in, albeit slowly. If someone actually did a study of the percentage of SBA loans vs. all small business loans, it's likely that SBA loans are making up a larger percentage of all loans made right now, than before the credit crunch. That would be a great article.
Secondly, as the author states, many banks have gotten out of SBA lending in the past few years, and especially in the last year or so. This is almost completely due to the rate issue. The rate issue is this: SBA requires an artificial cap on their loans, which cannot be priced above 5.75% over the Prime rate or over the one-month LIBOR rate. As with most government tinkering, this cap is currently causing all sorts of problems. To be fair, I've been working with SBA loans for 15 years, and this cap has always been in place, but has recently become a huge problem. In fact it's THE problem SBA has right now, as far as the rest of the world is concerned. Let me explain. In a recessionary environment banks are usually less willing to lend money. Think of this recession as a recession on steriods when it comes to bank lending. Banks are running scared and are only lending to their best customers right now, and (here's the key) at much higher interest rates. Higher rates are actually good for all of us, because banks raising their rates is going to fix the credit crunch we're all suffering from. Yes, it will mean we all pay a bit more for money, but it will get the money flowing again – it's simple economics. But, put yourself in the shoes of a commercial banker – you are charging your best clients rates in the 7-9% range, and now SBA's maximum rates are in the 5-6% range. Who wants to make a loan to a weaker commercial customer at a discounted rate? Almost no one! SBA NEEDS TO TEMPORARILY LIFT THIS RATE CAP!!! This is the simplest, and most effective way of insuring that banks will get small business credit flowing again! And it costs the taxpayer nothing!!! Small business owners would immediately be offered more access to credit (albeit at higher rates) and could make their informed choices from there. They don't have to take an offer if they dont' like the rate. This would get the market flowing again. After we're through this 'crunch' I'd suggest to SBA to reinstate the cap to what it's always been. As far as I can tell it's worked well for many years, up until now. Hope you find this helpful.
From Barry Brams, Los Angeles, CA The SBA needs to make loans available to start-ups without the current onerous regulations for collateral. If someone wants to initiate a new business and doesn't have 80% of the amount of the loan in the form of collateral, the SBA won't guarantee the loa. The emphasis should be on helping new businesses to launch and hire new employees, without having to have a large amount of cash or collateral on hand. Also, if a new business owner has a home, he shouldn't have to worry about potentially losing it because he had to plege it as collateral in order to qualify for a loan. As it currently stands, a person with a great idea, a well executed business plan and a management team in place can't even apply for an SBA loan if they don't have substantial assets. The whole point of the SBA should be to enable the creation of new businesses and jobs, regardless of whether or not the applicant has substantial resources, or not. Anyone with a good idea should get the opportunity to launch a new business with government help via the reorganized SBA.
From Rand Slager, Florida There two markets: commercial and Federal. The federal is dominated by firms over $10B in revenue and the small business size needs to sustain small to mid-size firms. With the complex contracting rules few small businesses survive in the federal market while in commercial they are very successful. It is not a simple issue. One size fits all fails the two markets.
From Clynton, Virginia Beach, VA Very well stated. SBA is made up of many cheerleaders, but they don't have much power to fight on our behalf. They talk a good talk, but real small businesses are still getting whacked left and right by the big guys – and by the banks.
From anonymous, Washington DC I think that the author of this article needs to take a bit more time to better understand the agency; it would be particularly enlightening if actual SBA employees or disaster contractors were interviewed for this piece in order to get a better idea of internal sentiment. Now, as for some of the points raised in the article:
1. A large percentage of SBA leadership has an education and/or professional background in law, not business, so the emphasis of strategy and decisions is focused more on regulatory compliance.
2. How does one propose to recruit talent to SBA which has experience running or working in a small business environment, when the economic benefit of working in federal government (and particularly at SBA) is nothing compared to the potential rewards of the business world?
3. Citing Hurricane Katrina as an illustration of SBA's incompetence is alarmist and an exaggeration at best; expecting instantaneous decision-making and financial assistance in the wake of a catastrophe of such scale is an unreasonable expectation. SBA's handling of the floods in the midwest last summer is a far more reasonable expectation of performance, and it is difficult to say that SBA did not meet or exceed expectations in that instance.
4. The employment of the distaster loans to bail out small businesses in the current recessionary environment is imprudent; such a proposal is indicative of the philosphy of the cult of instant gratification that has placed the US economy in its current predicament.
5. Congress, the legislative branch, needs to stop taking special interest money from those groups who seek to expand the parameters of what it means to be a small business. Right now 'small business' means too many things to too many people. Either you're a small businessperson or you're not, and the categorization of a business should be simple and straightforward.
6. Cleaning up the definition of 'small business' would simplify the enforcement process, and would reduce the need to hire and maintain an army of compliance officers to look over the shoulders of contracting officials at each and every government agency.
7. The SBA's loan guaranty program business model behaves more like an insurance company than a bank, so it might make more sense to apply actuarial analysis to set premiums charged to banks who use the program. And it may reduce the documentation and compliance requirements enough to encourage more banks to participate in the program.
From Hoyt Donaldson New Hope AL Change the loans from variable rate to fixed. A variable rate loan is like a chain on your leg with a ticking bomb on the end. It affects every decision going forward, and even though your business may be a success, the bomb can go off at any time and destroy it.
Why not a fixed rate, how greedy are these people!? Don't they want small business to succeed?
From RFS, Emmaus, PA My wife and I are in the process of finalizing an SBA loan for her small business. We started the process in May of 2008 and have yet to set a closing date, mainly because of the birage of paperwork and requirements for the loan. We had to cross our LLC protection and put up our house, personal life insurance, add the lending bank to basically all of the business insurance policies, etc, etc. The list goes on and on. During the process we actually stopped, but decided to keep going becasue we did not want to lose some upfront fees we paid plus we really need cash to meet payroll on some low months and consolidate some upfront credit cards and a small loan that we used to start the business. The entire process has been enormously time consuming, taking much time away from actual day to day business operations, plus we pay our own lawyer and accountant for help in getting the bank's long checklist of requirements met. Its almost like we gone so far and in too deep to not follow through with the loan…and again we are desperate for some cash – but in retrospec, if we new the process before, we may have stayed away. We understand they need to secure the loan, but there has got to be an easier way.
From Kirk Heriot, Columbus, Georgia The problems with the SBA correpond with the now popular belief that government can and should fix everyone's problems. What ever happened to the ideas of independence and self-sufficiency? I prefer that we leave things alone so we don't inadvertentl prop up bad business ideas with government money. Let the markets sort out the good from the bad, the successful from the not successful. The best thing governments can do is to eliminate regulatory obstacles that prohibit small firms from being successful. Americans do not need the government to help them realize the American dream.
From Craig, Hebron Illinois The SBA needs to be torn apart and rebuilt to meet the needs of the small business owners. Too often the SBA cares more to put forth an image of helping "underserved" people than the whole spectrum of small business owners in this country. They need to stop looking at race and gender as a basis for its approval of backing loans and more on the character & knowledge of the applicant. This country needs to have its small businesses strong for the economy to survive. As usual, our current administration gave help only to the largest of the businesses and to the banking industry. If any of these companies ran like should, they would not be in the situation they are in. But while they get help, it is the little man who suffers. They are the ones losing their jobs and homes, but it is their overbearing taxes that the government feeds to these greedy companies.
The sba loan suppose to be a second priority to lend money to the small business like home based business. Like I said they have to priorities they're agenda and prove that to the administration that will profited in the long term. Then may be the administration will give them some money to help other small busenisses to create more jobs and increase profits.