Let Them Make Mudpies

 

Jack Wells shifted uneasily in his chair. He was not happy about this. Not one bit. "They say a bureaucrat knows he's going to have a bad day when he shows up for work and finds a camera crew from '60 Minutes' in his office," he said, forcing a smile. "Maybe I should get somebody else in here." He picked up his telephone and dialed for help.

Wells is the chief financal officer in the Seattle regional office of the Small Business Administration. He is a short, rotund, good-natured sort of fellow, with thinning, gray hair and a slightly crimson face, which at the moment was clouded with worry. No camera crew from "60 Minutes" had been waiting for him when he arrived for work that morning, but he seemed to feel he was in for a bad day nonetheless. "I don't think I can talk about a specific case without some kind of letter from the company," he said.

The company in question was Imre Corp., a young biotechnology concern that had applied in September 1982 for a so-called SBA guaranty loan of $250,000 (meaning that the SBA would guarantee up to 90% of the amount lent by the participating bank). The money was to be used for equipment needed to start production of a promising new anti-cancer device.

Good intentions aside, Imre appeared to be a solid candidate for the loan. For one thing, its request had already passed through the credit department of Ranier National Bank, Seattle's second largest commercial bank, which has an excellent record of reviewing SBA loan applicants. Imre had emerged with flying colors. Indeed, the bank was so enthusiastic that it had decided to submit the application under a special program reserved for eligible loans of unusually high quality.

The SBA, however, had not shared Ranier's enthusiasm. Seven times, the application had been sent in for review; seven times, it had been turned down. By the time the process had run its course, five crucial months had passed, and Imre was fighting or its survival. Faced with mounting debts, a shattered credit rating, and dwindling operating capital, Imre's owner-operators had no choice but to turn to venture capitalists, even at the risk of giving up control of their company.

The perplexing part of all this was that, during the entire period, the company had always appeared to be on the verge of getting the loan. Granted, the SBA had raised various questions along the way, but Imre had systematically answered each one:

Would the U.S. Food and Drug Administration allow the sale and use of the biological material in the device? Imre obtained a letter of approval from the FDA.

Was there enough demand for the product? Imre gave the SBA letters from three well-known researchers at major medical institutions, stating their intention to acquire among them, more than half of the first year's production. The company also provided the names, addresses, and telephone numbers of nine other researchers who were ready to place orders whenever Imre was ready to accept them.

Could they manufacture the device as cheaply as they claimed? Imre brought in an independent expert -- a faculty member in the University of Washington's microbiology department -- who affirmed, in writing, that the company's cost estimates were accurate.

Was the collateral sufficient to protect the government against default? Imre pointed out that the SBA would have a lien on its laboratory equipment, which was worth $335,000 new and which could be resold for 50% to 70% of its current catalog price. Beyond that, the three principal ofiicers offered personal guarantees totaling $250,000.

And so it went. For every objection, Imre was able to give a logical, documented response. Moreover, the SBA seemed to be receptive. As the weeks went by, Imre's officers and representatives had numerous meetings and discussions with SBA officials, including Jack Wells. Each time, the officials would listen, ask questions, hear the evidence, and encourage Imre to resubmit its formal application. But then back would come another letter of rejection.

When it was all over, Imre's people seemed more baffled than bitter. Why had they been led on? And what was the SBA's real reason for turning down the loan?

Some suggested that the agency was out of its depth. In the final analysis, they averred, its officers were unwilling to take a chance on a technology, a product, and a market that they did not understand. "They have a problem with high-technology loans, and they know it," said Jere Glover, a Washington lawyer and former SBA official, whom Imre had retained to help present its case. "If this [application] had been for a car wash or a restaurant, it would have sailed right through."

But Jack Wells, for his part, was not about to concede that point. Although he could not discuss the specifics of the Imre case, he was happy to address the broader issues. "In today's world, we talk a lot about high technology," he said. "In the old days, it was called 'new inventions.' It's all the same thing. As loan officers, we really don't care if a product is the most wonderful thing in the world or not. It could be a new fishing rod. It could be a manufacturing process. Why, . . . "

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.