SBA policies frustrate owners of small businesses

June 03, 2007|By Ron Nixon and Elizabeth Olson | Ron Nixon and Elizabeth Olson,New York Times News Service

Hannah Kain, a small-business owner in Fremont, Calif., started her packaging services business, ALOM Technologies, in 1997 with a $250,000 Small Business Administration loan.

In 2000, her 70-employee company was singled out as an entrepreneurial success by the agency, complete with a ceremony in San Francisco.

But in 2003, when she lost a government contract to package and distribute informational compact discs to military bases around the world, she didn't bother to turn to the SBA for help.

"I'm not so sure about the overall competency level and the ability to follow through," Kain said. "The best you can expect is a list of government agencies you can contact."

Her assessment reflects a growing frustration among many small-business owners with the agency.

During the past five decades, the SBA has been there to propel the likes of Federal Express, Intel, Staples and thousands of lesser-known small businesses. But advocates say recent policy changes and severe budget and staffing cuts in the past six years have left the agency unable to fulfill its mission to provide programs and services to the nation's 25 million small companies, which the agency defines as businesses with 500 or fewer workers.

Since 2001, the agency's budget has been sliced nearly in half, to $464 million in the proposed 2008 budget. Staff cuts have been almost as deep, with the agency losing 31 percent of its work force.

Nowhere has the impact of these changes been felt more than in the SBA's primary loan program for small businesses, known as 7(a).

Since the 2005 fiscal year, the agency has cut funding to the program and restored an earlier, more costly fee structure for borrowers. Now a borrower pays a minimum of $2,000 in upfront fees for the smaller loans up to $150,000, a rise from $1,000 before.

For larger loans up to $700,000, the fee now is 3 percent, up from 2.5 percent before. For loans above $700,000, the fee remains unchanged at 3.5 percent.

Even with the higher fees, the agency says, the loans have easier credit terms and longer repayment periods than those typically available at commercial banks.

But many small-business advocates say that is a moot point as many small businesses cannot even pull together the amounts to cover the fees.

The SBA has also proposed raising the fees in its microloan program, which can be used for construction and expansion of facilities. These loans totaled $20 billion last year, according to the SBA.

While fees for the loans have increased, the average size of the loans under the 7(a) and microloan programs has decreased 25 percent, to $188,878 in fiscal year 2006, from $252,314 in fiscal year 2001, according to data from the SBA The total number of loans has more than doubled, however.

The SBA said part of the reason that the average amount of the loans has dropped is that a number of banks use a process called SBA Express. For it, banks use their documents and need less interaction with the agency. The SBA guarantees only 50 percent of these loans instead of the 75 percent to 85 percent on larger loans.

The increased fees for the loans might have had another effect. The number of banks participating has dropped by nearly half, to 2,751 in fiscal 2006, from 5,228 in fiscal 2001, according to the National Small Business Association in Washington. The association said some of the drop may reflect bank consolidation, but fees and other changes in the 7(a) program had the biggest impact.

Because of the higher fees, many entrepreneurs have turned to a growing credit-card market aimed at small-business owners. A survey by the association found that the overwhelming majority of small businesses use credit cards for their financing instead of SBA or other bank loans - meaning that the interest rate paid can be as much as 10 percentage points more than a conventional loan.

"The SBA in many ways is hurting small business by increasing these fees," said Marilyn Landis, owner of Basic Business Concepts, a small company in Pittsburgh, who relies on credit cards for most of her financing. "The decrease in the size of the loans is certainly a detriment to small companies - it's barely enough to get a company started and certainly not enough to grow one."

Landis is vice chairwoman of the National Small Business Association.

Even more than the higher fees, reduced staffing levels at the agency have had a profound effect on small business, advocates say.

Smaller staffs have contributed to a loss of institutional knowledge at the SBA and many people are in jobs in which they lack the necessary training, said Morris A. Little, president of B&W Solutions, a human resource management firm in Oxon Hill. Little is chairman of the board of the National Black Chamber of Commerce.

"You have people that can't even explain SBA programs to you," Little said. "It's frustrating, and after a while you don't even bother asking."

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