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.

Amid the partisan crossfire, it's easy to lose sight of some basic issues: Does the SBA still work? Does it even matter? Is Port Equipment the rule or the exception? The SBA has certainly stumbled over the years, but the debate in D.C. is abstract, complicated by politics and by the contradictions embedded within the SBA's mission. There seems to be a great deal of confusion about what the agency actually does. So I went to a representative district in Virginia to find out whom, if anyone, the SBA really helps.

"They're going to think i'm retarded"

Late on a Wednesday night last May, a small troupe of staffers from the SBA's Richmond office gathered at a cramped television studio on the near northwest side of town. They were there to take part in one of the office's latest marketing initiatives: a six-week recurring role on Sharing It With Bee Bee, a public affairs show on Channel 95.

In the show's first segment, the SBA's Luis Garcia and two counselors from the Service Corps of Retired Executives (which is funded by the agency) crowded around Bee Bee White, the cherubic mistress of ceremonies. Sharing It With Bee Bee was not exactly The View, nor even Charlie Rose. There were three cameras in the studio but nobody manning them, so viewers channel surfing on the far shores of the city's cable system were treated to static shots of the whole panel behind a plain wood veneer desk --no cuts from one speaker to the next, and however ready the guests might have been, no close-up was available. Bee Bee appeared a little nervous; she stumbled over her guests' names, and in a stilted voice posed questions that they themselves had written. Still, she was earnest, and the SBA visitors were game.

"Now, Fred, I understand you have three secret weapons," she said, setting up SCORE volunteer Fred Esposito.

"I do," he replied, proceeding to read off advice honed in 10 years of counseling: Wrap yourself in a "bubble of protection," he suggested. Profit from the counsel and credibility of an advisory board. Be active and generous in the community so you earn the right to make the sales call.

After about 15 minutes, Bee Bee opened up the phones. "I have a question for Fred," the first caller announced. "How often should you review your business plan?" A slow pitch right over the plate--so perfect there were whispers off camera that maybe it had come from a ringer. In fact, it was the second caller who turned out to be a plant. She, too, directed her question to Fred: "I was wondering, Mr. Esposito, what was the latest on the little chocolate shop that opened up recently." He grinned. "Yes--another one of my success stories that hasn't hit the newspaper yet is Bootsie's Chocolate. My wife is one of her best advocates." So she was--in fact, she was on the line now.

So it goes on community access television. These days, the SBA takes its publicity where it can find it. The Richmond District Office, one of 72 such offices, is responsible for administering the array of SBA programs across Virginia, save the area closest to D.C.--92 counties and 36 cities over 38,630 square miles. Traditionally, the most visible of this work has been guaranteeing loans, especially in the flagship 7(a) program, which backs general-purpose credit (see table, here). Staffers here also manage the technical assistance provided by organizations like SCORE, and counsel some businesses on their own. Ask anyone who works with the Richmond office--lenders, business counselors, local economic development officials--and most will speak of the people there with great regard. The district director, Ron Bew, has an unusual pedigree: a long career in commercial banking and then a political appointment at SBA headquarters as head of the Capital Access division. People who know him laud him for making the office more customer-driven. His staffers, they say, like the work they do and really want to help small businesses.

Still, pride in work is one thing; job satisfaction is quite another, and at the SBA a chasm has opened between the two. In the past 10 years, the agency has been radically transformed, spinning off many district functions to lenders and central offices. Banks sign off on most 7(a) loans now, and other loans are approved by SBA national centers. It's unclear whether this is good or bad for borrowers--national banks, especially, support the consolidation; some local lenders and SBA staff say jettisoning the personal relationships makes it tougher to negotiate deals and workouts. What it does mean is that fewer SBA employees work in the Richmond federal building, and the underwriters who remain find themselves with a different job description.

This alone, however, does not explain why almost half of the 30 positions that existed in Richmond five years ago have disappeared, or why, according to various surveys, SBA employees have just about the lowest morale in the federal bureaucracy. No agency has had its operating budget shredded as mercilessly as the SBA's (most agencies have gotten more money), and the cuts of the past six years have struck at all aspects of the agency. "The infrastructure is decaying," says one staffer. "Copiers constantly breaking down, 10- to 15-year-old fax machines."

Particularly hard hit has been the 8(a) program, which targets disadvantaged companies with business counseling and federal contracts. In recent years it has become "harder to keep up with servicing the firms," says Tammy Proffitt, who supervises the program in Richmond. In 2005 two of the four 8(a) business development specialists took early buyouts, leaving just Proffitt and the two remaining specialists to mentor about 260 companies, offering advice and referring them to procurement officers in the government. She wants to be a partner to her clients, "able to really look closely at their businesses and to know them well," she says. "But once you're servicing a hundred firms, that's almost impossible." Proffitt has since hired a third business development specialist, but it's a small improvement. As far back as 1980, when the average counselor in the region managed 17 companies, the General Accounting Office worried that the counselors were spread too thin.

Virginia is a lot of territory to cover, more than one might expect--Richmond is closer to New York City than to the southwestern point of the state. When staffers go out, they often leave before dawn and return long after dark because the office can't afford very many overnight stays. This is especially problematic because the district's biggest marketing challenges lie outside Richmond, as a map of the state hanging in the office makes clear. It's dotted with pushpins to indicate loan production, with the pins concentrated most densely around Richmond, the exurban D.C. counties, and Hampton Roads. A thinner trail follows the Blue Ridge mountains up the spine of the state. Elsewhere, evidence of the SBA is scarce. "The rural areas are harder to market to," Bew concedes. "It's costly, and there's a smaller population."

One day last August, lender relations specialist Ford Scott and business development specialist Bob McLoone signed out an agency car and made the long drive toward the Tennessee border and Abingdon, an old mercantile town in the far southwest part of the state with red-brick buildings and red-brick sidewalks. The next morning, Scott stood before eight local bankers in Abingdon to introduce them to the 7(a), which extends credit to businesses that can't find it on similar terms elsewhere, offering a break not in the interest rate but in the maturity. A 7(a) for working capital normally runs up to seven years, compared with under three for a typical unsecured commercial loan, which can work out to a 40 percent discount on the monthly payment. The loans particularly favor franchisees and restaurants and small retailers.

Scott, though, didn't so much market the 7(a) as explain it--an exegesis on its terms, rules, and procedures, all of which can seem onerous. The bankers listened quietly--maybe too quietly. At one point Scott solicited questions. Someone coughed. Then Scott resumed talking. Lately, the SBA has been offering an alternative version of the flagship 7(a), pushing smaller loans to more businesses under its easy-to-use SBAExpress program. While the traditional 7(a) backs general-purpose credit up to 85 percent, banks that use the Express program get only a 50 percent guaranty--but can follow their own procedures instead of the time-consuming 7(a) rules and approve the loans themselves. It's a tradeoff many banks are happy to make.

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.

Which brings us back to Volvo Park. Alutiiq is a subsidiary of the Afognak Native Corporation, which is in turn owned by about 700 Alaskan Natives from the Kodiak Island archipelago, the product of a settlement with Washington over land claims. Alutiiq is also an 8(a) company, meaning it's eligible to "win" federal contracts free of open bidding. But this palliative for urban poverty--8(a) was a response to the race riots of 1967--was always underfunded and, by most accounts, never very successful. In the 1970s, the GAO reported that the only way the harried SBA staff could meet White House targets for 8(a) contracts was to steer work to proven firms. Since then, most of the set-asides have gone to a small fraction of companies.

Twenty-one years ago Congress granted community-owned Alaska Native corporations, as they're called, contracting advantages that other 8(a)s don't have, creating, in effect, a preferred class within a preferred class. Crucially, Alaskan firms aren't subject to the limits on no-bid contracts that apply to other 8(a)s. And while the CEO of a regular 8(a) must be a "disadvantaged" individual, the Alaskans are free to hire whomever they choose to run the business--and usually their choices are rich with experience in government contracting, particularly at the Pentagon. When one Alaskan 8(a) grows too big for the program, the corporation can simply form another one--there's no limit to the number of subsidiaries an Alaskan firm can operate.

Procurement officials at federal agencies gravitate to the ANCs because, says Proffitt, "they don't have to compete contracts and worry about who might win. And because they can meet their goals with one significant contract." Predictably, the Alaskan 8(a) sector is booming: Its share of federal contracting set-asides has grown from $265 million in 2000 to at least $2.3 billion today, about 20 percent of all 8(a) dollars--most of that going to just 20 firms.

After a tour of the Alutiiq offices--a warren of cubicles distinguished principally by the state-of-the-art videoconference system in the conference room and the Kodiak art that lines the corridors--I was led to a modest corner office. I sat down with three white men, the executives of Alutiiq. CEO Dusty Kaser (who has since retired) has a background in construction; executive vice president (now CEO) Dick Hobbs served eight years in the Navy after graduating from Annapolis; senior vice president Ron Hancock served 20. They presided over an expanding portfolio of seven firms that provide the federal government with everything from guards and electronic surveillance systems to IT and "logistics support."

Though handsomely paid, the executives don't take the multimillion-dollar bonuses or stock options that you'd find at their publicly traded competitors. But it wouldn't be illegal even if they did, and that's precisely the point: Alutiiq is a small disadvantaged business in official status only. Certainly Alutiiq doesn't see itself as a small business. "Those contracts that we would pursue," said Hobbs, "they're not coming from the small-business community but from the big-business community." In general, they said, Alutiiq limits its interest to contracts over $3 million, beyond the reach of many small businesses.

Tammy Proffitt, whose team ministers to a few smaller ANCs (but not to Alutiiq, which is promoted by the SBA's Anchorage office) sees no such reluctance among some ANCs to take these smaller jobs. In any case, she adds, "there are lots of firms that can do multimillion-dollar projects." And even if the Alaskans now hunt bigger game, once agencies meet their 8(a) goals, they can with a clean (or cleaner) conscience bundle their remaining buys into packages beyond the reach of other disadvantaged firms.

Naturally, the Alaskans' deal has stoked resentment. The Alaskans defend their prerogatives not simply as remediation for past mistreatment but as a tool to provide for an entire society, not just a single entrepreneur. In 2005, "we returned $11.1 million in dividends to our shareholders," said Kaser. "And we employed 40-some shareholders on staff." Later, he added in an e-mail that "contracting preferences have the potential of doing more for the economic self-determination of our indigenous people than anything else Congress has come up with in over 200 years." It's not our purpose here to judge the propriety of pitting one aggrieved minority against another in a battle over table scraps. But economic development isn't really the SBA's mission--small-business development is.

"Life Is Good!"

Lunch at the Corner Bar & Grill in Richmond is noisy and boisterous. The Corner is a small, unpretentious place with just a couple dozen seats, all pretty much taken at midday. People come for corn bread flecked with kernels of corn, for blackened chicken, and for tomato-basil wraps. They also come because owner Herman Baskerville has created something of a community center for a neighborhood that has seen better days but aspires to better days ahead. Though Carver, a working-class district since it was settled in the 1840s, is largely African American, the Corner draws a strikingly diverse crowd. This is by design. "I think Richmond needs that," Baskerville said over the din when he stopped by my table. During the rush, he makes a point of wandering the dining room, greeting regulars and introducing himself to newcomers.

I happened to be sitting with a familiar face: Tanner Collins Jr., Baskerville's banker. Collins is a senior vice president at the Richmond Economic Development Corporation, which provided the Corner with a $35,000 microloan at 10 percent interest, funded by the SBA. Though Baskerville and his partner at the time had each put in several years managing large chain restaurants, that industry is notoriously unforgiving, and both Wachovia (NYSE:WB) and SunTrust (NYSE:STI) passed on the loan. In fact, even the local SBA staff, Baskerville recounted, put him off when he called for financing advice--inexplicably, he was told that restaurant loans are difficult to guarantee. Baskerville and his partner had enough saved to open the joint on their own, but the infusion from REDC in the fall of 2005 bought some advertising and equipment. "It started off slower than we anticipated," Baskerville said. "We figured we'd open up, and we'd do, say, $5,000 a week. It took us a while to get to $5,000." Without the loan, "it would've been tight."

Microloans are the SBA's second stab at financing very small businesses in gritty neighborhoods like Carver. The first, the Economic Opportunity Loan, was devised in 1964 as a weapon in Lyndon Johnson's War on Poverty. Directed toward black borrowers who had been rejected by at least two banks and the SBA's 7(a), the Economic Opportunity Loan program had, as a GAO official gingerly told Congress in 1981, "a difficult mission." Its failure, after doling out $1.1 billion, was spectacular. A 1981 GAO study found that among borrowers who received loans through 1978, more than 35 percent had defaulted. Of those loans still on the books in 1981, 36 percent were delinquent or in liquidation. And among the borrowers who had paid off their debt, only a third could keep their businesses going--or just 15 percent of all of the program's borrowers.

This time around, the SBA, with a page borrowed from the developing world, does it differently. For one thing, the microloan program is much smaller: In the 16 years since the first President Bush established the program, the SBA has loaned out only $230 million. For another, the money goes first to intermediaries like the Richmond Economic Development Corporation, which in turn make loans to people like Baskerville. Though in truth, most clients aren't like Baskerville; they usually require a lot of hand-holding, also funded by the SBA. At REDC, for one, most potential borrowers sit through a six-week, 18-hour class on business basics.

In eight years, REDC has loaned out $5.2 million, and its cumulative loss is just 6.4 percent. (The SBA has lost virtually no money on the loans--write-offs so far are one-tenth of 1 percent.) The organization calculates that it has created or saved 1,586 jobs in Richmond. And unlike their forerunners, microloans create jobs that tend to last. A survey by the Aspen Institute found that nearly half of American microborrowers were still in business five years later, a higher share than the SBA reports for small businesses as a whole. Such staying power is remarkable considering that microborrowers are poorer than average (a third live below the poverty line), have lower credit scores, and are mostly minorities. (In Virginia, African Americans borrowed 63 percent of all microloan dollars in 2006 versus just 8 percent of all 7(a) dollars.)

After lunch, Tanner Collins took me on a tour of microlending in nearby Jackson Ward, just west of downtown. This is one of Richmond's oldest neighborhoods--the red-brick row houses date from around the Civil War. In the 20th century it became a financial and cultural center for the black community, and today the streets hum with the effort to resuscitate that heritage. Collins presents himself as a cross between a loan officer and a motivational speaker, with a hint of the evangelical thrown in. "Life is good!" he likes to say. After 14 years as a commercial banker, he came to want more out of his work. At REDC, he said, "our jobs are also our causes. We don't need an alarm clock to get up in the morning."

As we drove, Collins pointed out his clients past and present: a construction company here, an optician there, a developer, an event staffing agency. We pulled up to 111 W. Clay Street, a handsome three-story brick house with Italianate details--segmental arches curve over the windows like eyebrows; lacy wrought iron frames the porch under a gently sloping eave. Derron Carmichael, the proprietor of a salon and clothing boutique on the first floor, was one of Collins's newest clients. Carmichael wanted to buy a building for the enterprise, Collins said as we got out of the car, "but it didn't cash-flow. So what we're trying to do is help now to get the business up and get the numbers right so that he can kind of get to that point." The $35,000 loan--to buy barber chairs and other equipment--closed just a few weeks before.

Inside, Carmichael was cutting a man's hair in the front room while his wife tended to a customer in the back. Business was good, Carmichael said. "We have to hire two new ladies," he said.

"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.

The question over who should pay for the SBA is something of a proxy for a long-standing debate over whether it should exist at all. Free-market conservatives make no secret of their disdain for the agency; in the 1980s, the Reagan administration tried to kill it outright. The argument goes like this: The notion that small businesses lack access to capital is largely a myth. While it may be true that "minority firm owners are less likely to have bank loans of any kind, they have easy access to transaction loans from nonbanks," Veronique de Rugy of the American Enterprise Institute wrote in a paper last year. "Bank loans represent only one of many ways to acquire credit." At most, she suggests, citing research from 1988, perhaps 2 percent of businesses have been unfairly denied credit, and another 4 percent have been discouraged altogether. In any case, she suggests, the SBA's role in the American economy is statistically insignificant--less than 1 percent of all businesses receive SBA loans each year--yet constitutes unfair competition to businesses that don't need such help and a potentially huge liability to taxpayers should the economy tank. (Because losses in guaranteed lending are relatively low--just 6 percent over 50 years--it's tough to call it a huge liability at the moment.)

The problem with this proposition, from a political standpoint anyway, is that despite the SBA's past failings, and the evident hypocrisy in Washington, the ribbon cuttings the agency delivers to congressional districts around the country make it enormously popular on Capitol Hill. However sympathetic Bush officials may be in private to De Rugy's thinking, they've had the sense not to publicly propose eliminating the SBA. In this light, the zero-subsidy faction appears to tread a fine line between conservative principles and a popular program. What is striking is the willingness in Congress, even among some Democrats, to go along.

One consequence has been the curtailment of a particularly influential program, one that targets early-stage companies. In 2004 the SBA stopped licensing so-called "participating security" Small Business Investment Companies, venture funds that use SBA-backed leverage to make equity investments typically up to $5 million each. SBICs have been around since the Small Business Investment Act became law nearly 50 years ago--in fact, they're the forerunners of modern venture capital. Participating security SBICs, created by Congress in the early 1990s, defer interest payments until their investments mature, correcting a flaw in the program that forced successful funds to limit their investments to businesses generating cash flow. They also distribute 10 percent of their profits to the government. Through last year, these SBICs had borrowed $8.4 billion in government-backed leverage to invest $11.6 billion in young growth companies.

Through 2000, according to the SBA, SBICs had performed competitively when compared with conventional venture funds. But the whole venture industry suffered with the dot-com crash. It also became apparent that profitsharing didn't compensate for a deal structure that benefited the private investors at the government's expense--a lot of SBICs made big profits even as the SBA lost money on its investment. The SBA projects the program will ultimately cost the Treasury $2.4 billion. Of course, venture investment is cyclical, and as the market has rebounded, so have the SBICs. As of last June, less than 2 percent of active participating security SBICs had losses high enough to be considered "impaired," compared with 20 percent a few years ago. Indeed, since 2005 the subsidy forecast has actually improved by $300 million. Yet by shuttering the program as the market hit bottom and forgoing the possibility of future profits, the government, as Lee Mercer, president of the National Association of Small Business Investment Companies, puts it, "has decided to lock in its losses."

VCs, too, have lately retreated from early-stage financing. Of the roughly $25 billion in venture capital raised in 2006, only about $5 billion went to businesses under development or just beginning operation, according to separate surveys by Dow Jones (NYSE:DJ) and PricewaterhouseCoopers. Nearly a third of that, $1.5 billion, came from participating security SBICs. These SBICs tend to invest in sectors that VCs often ignore (like manufacturing), and they spread the wealth to the far corners of the U.S. The $21 million in participating security funds invested in Virginia businesses constitutes nearly 6 percent of all seed and early-stage funding in the state last year. "There are very few early-stage funds active in Virginia now," says Thomas Dann, managing director of ECentury Capital Partners, an SBIC in McLean. The program's demise, he adds, "is going to impact deal flow for later-stage funds."

The traditional SBIC program limps on, and existing participating security funds will continue to make investments for another couple of years. Still, by closing the program to new funds, the SBA, by its own admission, has "removed the primary method by which [it] can provide access for small businesses to equity capital." Legislators from both parties have proposed reforming the program to make it more palatable to a risk-averse executive branch, including a more generous profit-sharing arrangement. Under this plan, says Mercer, "the only way the government could lose money is if it invested only in the worst performing funds." The SBA, however, disagrees. "We looked very hard at different structures for a new participating securities program, but it would have been prohibitively expensive for us to put that capital out there," says SBA administrator Steven Preston. "And models that would've enabled us to meet this zero-subsidy standard weren't models that were attractive to the industry."

It remains to be seen whether the zero-subsidy dynamic will remain in place with the Democrats in charge on Capitol Hill. For its part, the SBA, under Preston, has adjusted its priorities. Rather than eliminating the microloan program, for instance, Preston's 2008 budget request proposes raising interest rates to the intermediaries and offloading the technical assistance to partners that already provide training. It would not provide them with any additional money, however, and most have been flat-funded for years.

Preston, who last July became the agency's 23rd administrator, is forthright about his agency's problems. He's worked hard, with some success, to mend long-hostile relations both with Congress and with employees in the field. "I'm confident that you could call virtually any district office and virtually any program office in the SBA, and people would tell you it's a very different situation," he says. I took him up on that and found limited acknowledgment in Richmond. "It's like steering an ocean liner," said one staffer. "It takes a while to turn the ship."

Early on, Preston spent much of his time righting the ship of disaster aid, but now he's focusing more on the small business in the SBA. He'd like to shine a brighter light on federal contracting and reach more borrowers who've missed the SBAExpress juggernaut. He promises a new partnership with rural community banks and is mulling a loan targeted to disabled veterans. "We're trying to understand markets that we need to be in more," he says, "and figure out why we're not getting there."

Sustaining America

On the day I met her, Blanca Castillo sat smiling in a counselor's office at New Visions New Ventures, a Women's Business Center in Richmond. A Honduran immigrant who runs a waste-hauling business with her husband, Joel, Castillo was readying to close her first SBA-backed loan, for $30,000. She may not have known it, but she was participating in a pilot project called CommunityExpress, a program that the SBA originally positioned to supplant microlending. Businesses in designated distressed neighborhoods can borrow up to $250,000 at regular 7(a) interest rates and get technical assistance to prepare for the loan. Banks get to use Express's simplified rules but still get the full 7(a) guaranty. At 11.75 percent interest, the monthly payment worked out to $525; the fees were $775. Had the SBA directed her to REDC to apply for one of those microloans it no longer favored, she could have paid just $100 up front and saved more than $4,000 over the life of the loan. No trifle for a family with six kids.

On my last night in Virginia I saw Castillo again, this time at her house in a pleasant new subdivision of Henrico County, just outside the Richmond city limits. Nearly seven months had passed; she had used her loan to buy a truck. Castillo has been in the country for six years; her husband, Joel, also Honduran, came here 10 years ago. (They are both legal residents.) For much of the year, the Castillos work 16-hour days hauling trash from D.C. to landfills in central Virginia; her mother minds the kids in the afternoon. Now as we spoke, one of them wandered in and out of the living room, in his PJs and ready for bed. The Castillos are essentially subcontractors for a waste broker, but they now own a fleet of four trucks and employ a crew of three drivers and two of her kids.

At nearly 12 percent interest, the Castillos' loan struck me as expensive. But it turned out they had financed two other used trucks from local dealers at far more onerous terms: 19 percent interest. Blanca also has a personal loan to repair the trucks--at 29 percent interest. She marvels at the difference the SBA has made. "For $30,000, we're paying $260 interest a month," she said, "and we have a personal loan for only $7,000, and I am paying $190 interest a month!"

The Castillos' panoply of loans and interest rates certainly brings De Rugy's "many ways to acquire credit" into focus. Her credit market is an abstraction, a supernormal force that is always fair, always rational. In Virginia, at least, the credit market is atomized; its decisions are subject to the biases and whims that rule the lives of real men and women, to ambitions and institutional prerogatives that set the agenda at the office. But even if one grants De Rugy her twin contentions that the SBA financing has reached just 1 percent of small businesses and that no more than 6 percent of small businesses have been unreasonably shut off from conventional credit, the SBA still has many potential customers. Blanca Castillo, Port Equipment Service, all those folks Tanner Collins is keeping tabs on--in them the SBA has nurtured a new class of entrepreneurs where it might not otherwise exist, sustaining America in a way raw numbers don't illuminate. These are the businesses that through the generations have lifted millions of entrepreneurs out of poverty. They are central to our national character and our politics.

When I met Collins last May, the Richmond Economic Development Corporation was just finishing up an application to become a Certified Development Company. Collins seemed to think that half his microloan clients, among them the Corner and Derron Carmichael's salon, could soon invest in their own buildings--with the help of a 504. "That's why we're so excited," he said. "Because there's so doggone much low-hanging fruit." When I spoke to Collins again earlier this year, he had tempered his enthusiasm, but only a bit. By the middle of the year, he hoped, a couple of his clients might be ready to make the leap up from a microloan to the 504. "The first thing I have to do is slow them down," he said. Collins wanted to make sure they understood that with bigger dollars came bigger stakes--some were getting ahead of themselves. "But," he added, "that's what entrepreneurs do."

Robb Mandelbaum wrote about a father's attempt to raise an entrepreneurial son for the December 2005 issue of Inc.