"Excellent, excellent," said Collins. "Excellent, excellent. Do you have those gift certificates?"
"Yeah, we have those made up now."
"Okay, okay." Collins had softened his persistence into bonhomie. "Okay, okay. 'Cause I figure the only way I can get my wife in here is I'm going to have to give her a gift certificate." The room erupted in laughter.
Later, up the block, Collins paused in front of a 150-year-old building to point out another microborrower when he recognized the landlord. "How's it going?" he shouted out the window. "What's the good word?" We got out of the car. Workmen were buzzing around the ground floor, readying it for another restaurant--"upscale," said the landlord. "It's not going to be fish dripping grease." Collins produced a business card. "Have them give me a call so that, No. 1, they make the restaurant look good and, No. 2, they can make sure they pay you!" He continued: "We can help them make the improvements that might make the difference between the restaurant being okay and being the place to be." The landlord took us through the space, pointing out the recently sandblasted brick walls and the landscaped garden out back. "Life is good," Collins said as we headed back to the car. "Life is good."
But even for Collins, it's not without frustrations. "If I look at all the buildings, all these businesses," he had said in the car, "this should just be microcity." Last year, REDC loaned $620,000--but that's off $100,000 from 2005. Instead of expanding the microloan program, the current Bush administration has been intent on ending it. The counseling, particularly, is expensive--coupled with administrating the program, it cost 48 cents for every dollar loaned to small firms in 2006. In that sense, the microloan is nearly as expensive as its predecessor, though much more adept at creating lasting businesses. The only reason Collins is closing new credit is that Congress has sustained the program over the administration's objections.
The Zero-Subsidy Movement
Microloans are hardly Congress's only concern. The small-business committees still fume about the loss of the LowDoc program, a variation on the 7(a) that catered to less established borrowers with smaller loans. A LowDoc loan required less paperwork from the lender--hence the name--but came with a full guaranty. Perhaps that's what did the program in. The SBA ended it in 2005, claiming losses were too high. Instead, the agency has emphasized SBAExpress, which it saw as a quick--and cheap--way to double the number of 7(a) loans. Express has come to dominate the program--in Virginia, it accounts for 60 percent of all 7(a) loans, though not quite a quarter of the dollar volume.
Still, the new prominence of Express raises questions about whether the SBA is reaching the borrowers who need it most. Across a wide swath of the rural Great Plains, for instance, beyond the reach of national banks, a lot of SBA credit disappeared with LowDoc. To many bankers and others in the industry, SBAExpress occupies the middle ground between a conventional bank loan and traditional 7(a) credit--trotted out when a borrower is "just a little bit of a stretch beyond the normal credit limits," according to Joel Pruis, portfolio management analyst at the Indianapolis consulting firm Baker Hill. Since most banks don't loan to start-ups, most Express loans don't go to start-ups, either. At Bank of America (NYSE:BAC), the nation's largest Express writer in 2006, both SBA and conventional loans are normally available only to businesses at least two years old, according to Jim Vaughn, a senior vice president. "The Express loan program was designed for those companies that were doing well, that had demonstrated cash flow, but were lacking collateral," says M. Jane Schwartz, president of Small Business Funding Group, a Philadelphia company that helps 7(a) borrowers present themselves to bankers. "It's a good program. But it was never designed for the riskier borrower."
This tension lies at the heart of the SBA's endeavors, the balance struck between limiting exposure to risk and reaching out to underserved borrowers. One way to look at this effort is as an investment, though the economic data is scarce. In 2004, researchers at the Federal Reserve in Cleveland attempted to calculate the added value of SBA lending. Their very preliminary econometric model reported a "positive, albeit small, impact of SBA-guaranteed lending on personal income growth." "The number is small, but the program is small," says James Thomson, one of the study's authors. While such numbers should be treated skeptically, the surplus--whatever it is--eventually ripples through the economy, making its way back to the government as income tax paid and costs avoided. For instance, assuming the SBA meets its goal of creating one job with every $50,000 of 504 lending--and the SBA says many Certified Development Companies exceed it--the cost per job in 2006 was a mere $188; the Treasury would earn that back many times in a single year's tax bill. Similarly, studies of microlending have shown dramatic personal income growth for business owners; for many it is an escape from poverty and from welfare rolls.
But more and more, the SBA seems to regard its own work more as a burden to be borne than as an investment to be reaped. For years, bankers and borrowers shared the cost of losses on SBA loan programs with taxpayers, through an annual appropriation by Congress that covered the difference between program costs and loan fees. In 1997, however, the Clinton administration struck the 504 program from the budget. In 2005, the Bush administration followed suit with the 7(a) program. This took $100 million out of the SBA appropriation in a single stroke, which the agency recovered by raising borrower fees. Last year the White House floated further fees on million-dollar loans and investments to cover the administrative costs, although opposition in the congressional committees promptly nixed that idea.
