Time to Fix the SBA

Angel investors are usually wealthy individuals, often successful entrepreneurs, who make small (generally less than $500,000) investments in start-ups. They play a key role in fostering entrepreneurship because few venture capitalists are interested in such small deals and most banks balk at lending money to early-stage companies -- even with a partial SBA guaranty. Amazon.com, the Body Shop, and Bell Telephone all got their start thanks to angels. But these days, such funding is among the hardest to come by.

The SBA can help. It has the resources to create an angel fund, modeled on its Small Business Investment Company (SBIC) program, which is designed to encourage venture capital investment. Under that program, the SBA licenses private venture capital groups as SBICs, which then qualify for matching funds in the form of government loans at favorable rates. The problem is that the program requires SBICs to raise at least $10 million from outside investors before qualifying -- something that only about 20 funds have been able to do so far this year. As a result, the SBIC program has not taken full advantage of the $7 billion in guaranties Congress has authorized, awarding roughly $2.5 billion in each of the past two years.

Sometimes, SBA rules actually shut out companies that would make the most promising candidates for investment.

We suggest creating an angel investment program by shifting some of these unused SBIC guaranties. The government would require angels to raise much less private capital up front, say $100,000, and provide the same kinds of loans they do to VCs, albeit in smaller amounts. Of course, the angels would need a track record -- to qualify, the Feds could require investors to have made investments of, say, more than $100,000 in at least two companies a year for the last four years. Such a program would go a long way toward luring risk-averse angels to begin investing again, says Carol Sands, founder of the Angels' Forum, an early-stage investment organization in Silicon Valley. "It would have a huge impact on the economy," she says.

Make investment countercyclical

Congress has authorized the SBA to guarantee $21 billion in loans and venture capital for fiscal year 2003. You'd think that would provide a great boost to the small-business economy. But instead of acting counter to the markets -- picking up the slack when the private sector retreats -- SBA programs mirror the markets. Last year, for example, when commercial lenders and venture capitalists found it more prudent to sit on their cash, the SBA proved to be of little help. In fact, two of the agency's largest programs -- the 504 loan, designed to finance real estate and equipment purchases, and the SBICs -- both failed to come close to reaching their caps for administering government-backed funds.

Consider the SBICs. We like this program. It's a good example of how the government and the private sector can work together to stimulate investment. But here's the problem: In 2002, when the overall amount of VC dollars invested dropped 54% from the previous year, SBIC investment dropped right along with it, falling some 40%. The SBA needs to find ways to stimulate SBIC investment when the private market dries up. One idea is to open up the SBIC program to the big guns. Right now, SBICs are limited to borrowing $113 million from Uncle Sam at any given time. Why not double the cap and attract heavier hitters to the program? While 41 new SBICs were licensed in 2002, this year we'll be lucky to hit 25, according to Lee Mercer, president of the National Association of Small Business Investment Companies. The reason for the falloff: Most groups can't raise private funds to qualify for the SBIC matching dollars now. Raising the cap to allow bigger funds to participate would clearly have a countercyclical effect. In addition, the SBA should require SBICs to use it or lose it. Right now, the SBICs have four to five years to take out the loans for which they qualify. A shorter time frame would encourage investors to invest, rather than sit on, their money. Two years makes a lot more sense.

Cut the red tape

Wanna see something ugly? Take a gander at Standard Operating Procedures 5010. That's the SBA's 727-page rule book for its flagship loan program, the Basic 7(a) Loan Guaranty. Under that program, the government guarantees a percentage (generally 75% to 85%) of small-business loans made by commercial lenders, with the hope of reducing the lenders' risk. The rule book outlines all of the dos and don'ts that bankers must follow when making SBA-backed loans. Do ask customers if they've ever been convicted of a felony. Don't lend to a passive holder of real estate, except if it's a hotel, motel, trailer park, or residential care facility. No gambling establishments.

 PREV  1 | 2 | 3 | 4 | 5 | 6  NEXT