Ronald Reagan thinks of the SBA as a welfare agency. Congress thinks of it as a pork barrel. Most entrepreneurs try not to think about it, period. Maybe we should all think again.
If Ronald Reagan seeks reelection and wins, the chances are good that during his second term a significant issue affecting small business is going to be raised, debated, and, perhaps, resolved for a time.
The issue involves the access of small companies to debt capital, and there are two main questions: Should the federal government play a role in making credit available to small companies, and, if so, what is the role?
It is not a new issue, but the last time it got a thorough airing was in 1953. The resolution reached then hasn't held up well over time, and, in any case, the world has changed in 30 years. So has what is known about the role small business plays in the scheme of things.
If small business was thought of as a good thing for the country 30 years ago, it was not considered crucial. Small business people opened shoe stores and car washes in the new shopping centers that accompanied the post-war suburban sprawl, but economic growth in the United States then was strictly the business of big business. "I thought what was good for the country was good for General Motors, and vice versa," said President Eisenhower's newly appointed defense secretary, Charles E. Wilson; Jimmy Ling was well along toward inventing the conglomerate, and America's largest corporations were busy transforming themselves into multinationals.
As small business was considered rather more important for its votes than for its economic impact, Congress resolved the small business credit issue facing it then by creating an agency, the Small Business Administration, that was more symbol than substance. Today, as the role of small businesses in the U.S. economy has become more important, and as that importance has been recognized, the inadequacy of that 30-year-old symbolic gesture is becoming painfully apparent. Not only did Congress in 1953 underestimate the resources the SBA would need, it never clearly defined what the agency was supposed to do.
Consider the cases of Taylor and Stutt.
In 1974, Elizabeth Taylor, not the actress, but a woman running a small St. Louis catering service, asked the SBA for a loan of $86,900 to start a restaurant. The agency turned her down, partly because an SBA official believed that she wouldn't have enough working capital. Three weeks later, though, after a review, the agency lent her $36,700, less than half the amount she had asked for, and Taylor opened the restaurant anyway. The SBA official had been right. Without adequate working capital, Taylor had to borrow another $32,000 the following year, but the business failed just the same. Taylor lost her savings, her home, and her health. "I can't tell you how it would have helped my life so much if they had never given me the damn money," she told reporters for the St. Louis Globe-Democrat. "All it did was ruin my life."
Brian and Sharon Stutt spent six months in 1978 applying for a $50,000 SBA loan to buy inventory for their nascent Houston appliance-retailing business. They had a novel business plan, very little equity, and no collateral. Finally, they abandoned the loan application and pushed on without the money. In 1982, their company, Warehouse Appliance Inc., recorded sales of $8.9 million and last year ranked fifth on INC.'s list of the 500 fastest-growing privately held businesses. "We could have really used that money," says Sharon Stutt. "We'd probably be a lot bigger today."
Taylor is angry because the SBA gave her the money, and the Stutts are angry because it didn't. The agency couldn't win, because the guidelines Congress drew up for it in 1953 made winning impossible and created a permanent ambiguity. On the one hand, Congress told the SBA to make loans only to businesses unable to acquire credit "on reasonable terms" from another source. (Both Taylor and the Stutts had been turned down by banks.) On the other hand, the SBA was only to lend when the chance of repayment was "reasonably" assured. (The banks weren't convinced they would get their money back from either venture.) The two conditions were frequently contradictory, and thus the SBA was born schizophrenic. It developed a dual personality, and in the first one it saw itself as a welfare agency.
Congress gave the SBA authority to make two kinds of loans, direct and guaranteed. Direct loans, as the name implies, involve taking money from the U.S. Treasury and handing it over to someone who wants to start a business or whose business needs capital to grow. The SBA uses direct loans when it is behaving as a welfare agency, and these loans have created problems for the agency and for loan applicants, successful and otherwise, that Congress perhaps should have anticipated, but didn't.
Consider the case of Luther Boykins, a black barber who applied for and got three direct loans totaling $100,000 from the SBA between February 1970 and April 1971. Boykins used the cash to open and operate a grocery store that failed six months after the last loan was made. Not only was he out of business, he now owed the U.S. government $79,183 in principal and interest.
If Boykins was going to succeed in the grocery business, he needed more than money. He needed advice about where to locate his store, how to buy inventory, how to price his products, how to keep business records, how much to pay his help, how much working capital to borrow. Other than the money, Boykins claims, the SBA gave him no help at all.
In 1981, in an ambitious, nine-part report on SBA lending, the St. Louis Globe-Democrat examined more than 14,000 direct loans (including Boykins') made by the SBA over nine years in 15 states and found that 42% of the loans had gone into default; 33% of the dollars lent were never repaid; and new loans were made to refinance earlier loans to keep the records looking good.
The Globe-Democrat series prompted a hearing by the Senate Small Business Committee in 1981 into the shortcomings of the direct loan program. After hearing from Boykins and other witnesses, Sen. John Danforth, (R-Mo.), a committee member, delivered an admonishing lecture to the SBA officials present. "The purpose of the direct loan program, or any assistance program for that matter," Danforth informed them, "is not to throw money on the streets. . . . It means taking the time to make intelligent loan decisions, providing counsel where needed, and even turning away prospective loan recipients when it simply does not make sense to make loans. That should not be too much to ask." Somehow Danforth had missed the whole point of the Globe-Democrat series and of the testimony given at the hearing, both of which had made plain that it is too much to ask.
