Departing Small Business Administrator Karen Mills sat down with reporters recently to discuss her record at the agency and her reasons for leaving. In the following edited transcript of her conversation with Inc. staff writer Jeremy Quittner and others, Mills, a former venture capitalist, described the agency she found, the one she left, and the one that is likely to continue on after her. Mills also talked about the profound impact sequestration is likely to have on the SBA and small business owners in the coming months.

Why are you stepping down and what are you going to do next? 

This is a good time for a transition. As far as the next steps, I have not yet made any decision. I am thinking about a whole variety of options, and I have pledged to the president to stay until my successor is named and confirmed. I am thinking about a wide array of things. There has been no announcement yet about my successor.

Can you evaluate the SBA's policy response to the economic crisis and what you might have done differently?

Let me take you back to four years ago. It was pretty dismal in terms of the economic environment, and it was really a scary situation for small businesses. The credit markets had frozen, and SBA lending had been cut in half.

It was in a free-fall and we knew we had to do something. The regular banking market was pulling lines of credit for strong companies that were paying their bills, and we knew we had to act immediately. So in the Recovery Act, we were able to eliminate our fees and increase our guarantees to 90 percent.

What was remarkable was the moment that went into effect, it was like the hockey stick that did occur. The lending turned around.  The whole agency responded and processed loans and got applications ready. I had thought we would slowly begin to turn things up, but we really dramatically were able to stop the tide. One smart thing we did at the recommendation of my capital access team: we could have taken the money out slowly with some fee reduction, or just eliminate fees right away. We chose to be aggressive in support of small business and that turned out to be the right decision.

What was the disconnect between banks and the SBA during the crisis? Small businesses still say they can't get bank loans.

Our lending did change. We were able to step in and take some of that. We are generally, on a good day, about 10 percent of the market. So what was going on in the rest of the market?

The answer is the rest of the market was still tight. Now it's turning around, but we are still down almost $100 billion in bank lending to small business. We went out to the top 13 banks and got a pledge from them to increase their lending over three years by $20 billion. And those were significant increases for them, and these were some of our biggest lenders, including JP Morgan, Wells Fargo, Keybank and a number of others, and we have delivered on that. We are more than 50 percent there after one year of that commitment. We did everything we could within our power and everything we could with the main piece of the market.

You inherited an agency that had become a political football, and had been neglected by the prior administration. What was morale like?

The morale when I came in was not the best. It was because the agency had not been valued. And when I picked up the lid, looked in, and saw the assets there, I was amazed: $90 billion, now $100 billion, in loan guarantees, 900 small business development centers, 12,000 SCORE volunteers and 100 district offices. 

We were a small agency with a big mission. What they needed was an administration who valued what they were doing. This president from day one, when he asked me to joining the administration, made it clear that small business was a priority. He made me part of the economic team, and later raised me to the cabinet. 

What will the sequester do to the SBA and small business?

The largest impact is that the caps on our loan volume will go down, as is required. We are taking about $1 billion from our cap. But even with the lower cap, we think we will be able to provide the loans and loan subsidies through the end of the year without rationing or slowdown.

We have been planning and managing this for quite a period of time to minimize the impact, and so we know that it will be difficult but we are hopeful we will be able to continue to do the things we are doing now. We will take cuts in our constituencies that are required by law. I have publically said to the whole agency, because we started planning for this many months ago, that we will not have to furlough, and we did early retirement a year ago.

But the real problem is small businesses, particularly those who serve the federal government in contracting. They have already felt the brunt. Starting in December, small business contracting by the Department of Defense went way down and small businesses are not getting these contracts. We have already seen it will have a negative effect on small businesses.

You've thought a great deal about the importance of business clusters and their relation to economic growth. Were you able to apply your thinking at the SBA?

I am quite proud of being ale to start and fund across the Administration 56 clusters. It is fabulous and so exciting. I had worked in Maine for the governor and had [helped create] a cluster of Maine boat builders. I had gotten involved with Brookings and wrote a paper on clusters, recommending a federal government role. At SBA, I got funding for 10 clusters [initially] and worked with a number of other agencies, like the Department of Commerce and the Economic Development Administration, to do [a total of] 56. We have clusters around the country now, and they are networked and being evaluated. This is how we can execute the president's economic strategies, through place-based entrepreneurial business centers.

There's so much cool entrepreneurship going on now, and the SBA is seen as a creaky old agency; can it have a "Wow!" moment? 

I think it is having a "wow" moment now. It is has come out of its shell, and emerged not just in the administration, but in this bone structure around the country as the magnet for entrepreneurs. In our district offices, we are the coordinating entity between state export programs and contracting advice and banks. We now have the foundational elements for being "wow" and I think we are "wow", but we need to be more recognized as being that vibrant.

What's the most important thing you learned in your tenure at the SBA?

The biggest thing I learned, and the most wonderful thing, is the great rewards of the public sector. I came from the private sector and this was my first government job. People say you can't get a lot done, and what I found is you can do transformational things even within the constraints that exist, and the rewards personally and professionally far exceeded everything I might have had.

The agency is very well-positioned now, and it is strong internally, and there is an understanding of the interconnection between small business, entrepreneurship and economic competitiveness. That is well-understood and in the forefront.