SBA Financing – Don’t Throw the Baby Out With the Bathwater
The U.S. Small Business Administration is facing large cuts in its 2012 budget with some estimates running as high as 45% over the 2010 stimulus rich budget amount. When factoring out the supplemental appropriations in 2010, which totaled $962 million, the 2012 budget is estimated to be $161 million higher, but it will be lower than what was proposed for 2011. The SBA, much like some government agencies, can use a trim, mostly administrative positions, but it likely does not need the gutting that many other government agencies need. The reason for this is that the SBA is one of the few agencies that assist in the creation of wealth in our country through the much needed financing of the United States’ small businesses.
By partnering with financial institutions to finance these businesses, when these institutions alone would not even touch them, the SBA helps to create the jobs that we need to expand our businesses, thus serving to create wealth from both a business and individual perspective. One of the primary loan programs the SBA runs is a zero subsidy program to the government and on occasions has created a surplus which of course gets used elsewhere. This is amazing, especially when put in the context of the fact that these loans are at rates that typically are below rates that financial institutions charge and tend to be to businesses that these institutions consider a much higher risk. The March 2011 20 year full term effective rate for this program was as low as 5.941% for the SBA’s loan, so go see if a bank will give you a fixed rate loan that low and for that long. My guess is that it won’t happen.
The financial institutions that participate in the SBA’s loan programs are truly a catch 22 for businesses that need the SBA funding. On the one hand, you can’t get direct funding from the SBA in most cases without the participation of these lenders, but many of them, despite the decreased risk due to the SBA’s participation, are not putting money on the streets at rates that can really make the difference in getting our job machine revved up.
While most large businesses are cutting jobs left and right, its businesses with less than 500 employees that are adding jobs. According to a March 30, 2011 article in the Orange County Register entitled “Small private employers lead big job growth in March”, ADP, which has 550,000 employees it manages payroll for, added 184,000 small business employees (for businesses with less than 500 employees) versus only 17,000 in its larger business segment for March 2011. Because small business job growth is so critical, without lenders participating in the process to a much higher degree, the money will not be available to continue fueling new job creation in the near and not so distant future. Because lender participation is spotty at best, the SBA should consider a new provision to either directly, or through conduits such as Certified Development Companies or other such lenders, lend directly to businesses needing funds for equipment, real estate, etc., thus getting the flow of money going back out on the street in a way that is not a hand out, but rather a way that helps create jobs and ultimately business and personal wealth.
The cutbacks that are being proposed, while significant, should still allow the SBA to assist a large number of businesses while maintaining strong lender oversight. The SBA as a whole; however, should not be cut back too much further (other than possibly at some of the administrative levels) than what is already being considered since this could serve to undermine the good it does and that would be like throwing the proverbial baby out with the bathwater, thus further hurting our chances of coming out of this nagging recession.