Does the SBA Still Matter?

Tom McDonough and Dan Stevens lay the credit for building their business to, well, their building. And they lay credit for the building to the U.S. Small Business Administration.

In the summer of 2001, having spent years working in the ports around Hampton Roads, Virginia, repairing the enormous cranes that lift containers off ships and onto the backs of trucks and trains, the two men decided to go into business together. It was a propitious time: Container traffic dominated the ports, the ports dominated Virginia's southern coast, and there were few other mechanics so skilled. For months, the two kept themselves busy working from a garage in a marina out in Rescue, a quiet and remote fishing village across the James River from Newport News.

It was not long before Port Equipment Service, as the pair called the new firm, began to outgrow its rented digs. McDonough had spotted a vacant tile store along the interstate in Portsmouth; its exterior was adorned with tiles in garish primary colors, but he saw in it a location closer to the port, with room to grow. So he and Stevens cleaned themselves up and made the rounds soliciting loans from the big banks. It was, they realized quickly enough, a fool's errand. "We approached just about every bank in town with a financial package," only to leave it with a receptionist, McDonough recalls. "I never got to talk to anybody. Both Dan and I had owned a couple houses, had bought several vehicles. And neither of us owed anybody any money. We felt like we were 18 again, trying to borrow the money for a car."

Finally, they visited TowneBank (OTC:TOWN), a small community bank then open just two years. Here, they caught a break, and they found themselves facing the business banker, a man named Ed Eaves. "They came in, and they laid out their business plan," Eaves recounts. "Their financial position was weak." And yet, "these guys seemed to be very knowledgeable about what they were doing, and about the opportunities for growth at the port." A few phone calls established that the men had sterling reputations. And Eaves could see they were resourceful: Right around that time, they had bought a bunch of old cranes for $10,000, picked them apart, and refurbished the components, which they sold at great profit.

Port Equipment Service moved into its new headquarters at the end of December with a loan for $321,467.18 facilitated by TowneBank. Just down the road from the Hampton Roads Regional Jail, the building is nothing fancy: a plain suite of offices in the front and a large workshop in the shed behind. The worn tile has given way to clean stucco; the building is neat and tidy but scarcely merits a glance from the motorists buzzing by on I-264. It did, however, capture the interest of the Intermodal Department at Norfolk Southern Railroad. By April 2002, McDonough and Stevens felt confident enough to invite the railroad's officials to their grand opening, and the railroad, in turn, felt confident enough to invite the new firm to bid on a maintenance contract, which Port Equipment promptly won. Without the new building, says McDonough, "we would have taken them out to the garage we were working out of out there in Rescue. They wouldn't have been interested."

Doing Less With Less

But then, TowneBank wouldn't have been interested in working with Port Equipment either if it hadn't had the support of the Small Business Administration. About a third of Port Equipment's debt is carried by a local nonprofit called Tidewater Business Financing Corporation. Tidewater is a Certified Development Company, eligible to make loans under the SBA's 504 program. Designed to help small businesses finance real estate or machinery, 504 loans require the borrower to make a smaller down payment--usually just 10 percent--than a conventional deal. Perhaps more important, the loans grant small companies access to the kind of well-priced financing normally reserved for big corporations.

The SBA insists that every $50,000 loaned by a Certified Development Company should create or retain one job. By that metric, and every other, Port Equipment has done phenomenally well: In five years it's grown from five employees to 50 who are spread out among the six intermodal yards the company now maintains for Norfolk Southern (NYSE:NSC). Revenue, which amounted to just $300,000 in 2001, reached nearly $6 million in 2006. The bankers who turned them down in 2001? "They all come knock on my door and ask if I'm interested in doing business with them," says McDonough. "I say, 'We do all our business with TowneBank."

The SBA itself hasn't fared nearly so well. Chartered in 1953 to "aid, counsel, assist, and protect, insofar as is possible, the interests of small-business concerns in order to preserve free competitive enterprise," the agency's portfolio is bigger than ever. It guarantees more loans, its partners coach more small companies, it helps more contractors negotiate the labyrinthine ways of the federal government, and SBA officials spend more effort stumping for the President's economic policy. Yet the agency's budget (excluding disaster loans) has been slashed by nearly 40 percent since 2001. The SBA, one hears all the time, is "doing more with less."

Meanwhile, complaints of mismanagement, nearly as old as the agency itself, have grown more vehement; in particular, they still swirl around the difficulties processing Hurricane Katrina recovery loans. And small businesses, SBA partners, and advocates in Congress--Democrats and Republicans--fear that in its main line of work the agency is in fact doing less with less. They worry that the retrenchments of the past five years have disproportionately hurt rural and minority businesses and that all borrowers are paying more for services. They note how President Bush demoted the SBA from the cabinet status it enjoyed beginning in the Clinton administration and that the loss of attendant prestige has made it even harder for it to lobby other agencies on behalf of small contractors. On the other hand, to a small but noisy band of ideologues who consider the whole premise of government intervention to preserve free enterprise oxymoronic, all this is hardly enough; they've intensified a campaign to shut down the SBA altogether.