Does the SBA Still Matter?

I wanted to know what lenders here made of the SBA--Abingdon's county delivered just one 7(a) loan in 2006; the five surrounding counties just four more. So a few months later, I rounded up four lending officers, including two who had sat in on Scott's talk and one who had heard it in 2005, and took them to lunch. Two had little or no SBA experience but together they mustered several objections. SBA lending is cumbersome. They were looking for solid collateral, and if a borrower had it, the SBA's guaranty was superfluous. And though they were careful not to put it too bluntly, they had bigger fish to fry than the storefront start-ups often attracted by the 7(a). "I'm trying to call on businesses that are more established," said Joe Waters II, of National Bank in Abingdon. "I have somebody I report to, and if I send him too many ice cream shop deals, they're going to think I'm retarded."

The definition of small

Alutiiq is another model of SBA success, but its story is a bit more complicated than Port Equipment Service's. Alutiiq occupies space in several buildings of Volvo Park, a low-slung office complex hidden behind a medical center in Chesapeake. Working from this nondescript campus and seven others around the country, Alutiiq raked in $533 million in revenue in 2006, virtually all of it from the government, won under contracts set aside for small disadvantaged businesses.

Prying the government wallet open to small suppliers has been central to the SBA's mission from the beginning. For small enterprises trolling the federal marketplace, the agency is supposed to be both guide and advocate, riding other government offices so they meet an annual goal--not a requirement--that 23 percent of total prime contract dollars from across the government be delivered to small businesses. The SBA boasts that with its help, Washington has come close to, or even exceeded, the target in each of the past five years. In 2005, the agency claims, $80 billion, or more than a quarter of prime contract payouts, went to small companies.

But disbursing taxpayer money is messy, and a quick scan of the companies that received the most small-business dollars in Virginia reveals an anomaly: No. 4 on the list, according to procurement consultant Eagle Eye, is the $24 billion behemoth General Dynamics (NYSE:GD). Over the years, audits that demonstrate how a substantial share of contracts credited to small businesses are diverted to large companies have generated headlines but little action. The problem is that government procurement officers are simultaneously overworked and under pressure to cut acquisition costs, which discourages due diligence, if not dealing with small vendors altogether. The regulatory environment seems to accommodate this: Procurement rules are vague and easily misconstrued. Perforated with loopholes, they allow the SBA and the buying agency to pin oversight responsibility on each other. No doubt, too, some large contractors take advantage of the pervasive ambiguity and willfully identify themselves as small. While nobody has measured the prevalence of fraud, Lloyd Chapman, who heads the American Small Business League, notes that firms are unlikely to be deterred by the government's record of enforcement--not one firm has been prosecuted for falsely representing itself as small. (SBA officials say willful misrepresentation is hard to prove.)

The SBA has lately made it harder for bureaucrats to claim small-business credit for awards to vendors that grow big during the life of a contract, but critics, including the SBA's own inspector general, complain the changes don't go far enough. Indeed, at times the SBA has seemed indifferent to its own mission. In 2005, the inspector general's office examined six of the highest-dollar contracts the agency claimed went to small firms between late 2000 and mid-2002 and discovered that four of them were really awarded to big firms. Assistant inspector general Robert Seabrooks noted dryly in a memo: "As the protector of small-business interests, SBA should be taking the lead in ensuring that businesses that are legitimately small are receiving government contracts."

When it comes to the lofty goal of promoting small business, Washington seems to do a lot of winking. To be fair, the disingenuousness is hardly specific to the Bush administration or even the executive branch. Congress, too, talks a good small-business game, but the legislative history is replete with efforts to enlarge the definition of small--currently 37 separate standards apply to nearly 1,200 different industries--to include ever more constituents. In March, for instance, Democrats and Republicans introduced a bill that would, among other things, permit larger firms to get 7(a) loans.

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