Small Business Administration

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Small Business Administration
Logo of the SBA
Seal of the SBA
Agency overview
Formed	July 30, 1953
Preceding Agency	Reconstruction Finance Corporation
Jurisdiction	Federal government of the United States
Headquarters	409 3rd Street, SW., Washington, D.C.
Employees	2,147 (2006)[1]
Annual Budget	$443 million USD (2006)
Agency Executives	Steven C. Preston, Administrator   Jovita Carranza, Deputy Administrator
Website
www.sba.gov

The Small Business Administration (SBA) is a United States government agency that provides support to small businesses.

Contents 1 Mission 2 Structure 3 History 4 SBA Loan programs 5 SBA Loan Industry 6 SBA Secondary Markets 7 Small Business Investment Companies (SBICs) 8 Criticism 9 See also 10 References 11 External links

[edit] Mission

According to the agency, the mission of the Small Business Administration (SBA) is "to maintain and strengthen the Nation's economy by aiding, counseling, assisting, and protecting the interests of small businesses and by helping businesses and families recover from economic and other disasters."

The agency is also responsible for providing loans to homeowners and renters that have been victims of presidentially declared disasters. Presidential declarations automatically make disaster assistance available to victims if they meet qualifications. The Department of Agriculture and state governors also have the authority to request declarations on areas affected by disasters in their jurisdictions. Over 80% of the loans processed by the agency are for home owners and renters.

[edit] Structure

The SBA is an independent agency that operates under the authority of the Small Business Act of 1953. The secretary of commerce delegates small business responsibilities to the SBA. The organization and management of the SBA consists of an administrator and deputy administrator, who are appointed by the president and approved by the United States Congress; field office directors; and administrators for the various program areas. The SBA also has associate administrators for the following offices: Disaster Assistance; Field Operations; Public Communications, Marketing, and Customer Service; Congressional and Legislative Affairs; Equal Employment Opportunity and Civil Rights Compliance; Hearings and Appeals; and Management and Administration.

There are also associate administrators for Investment; Small Business Development Centers; Surety Guarantees; regular Government Contracting; and Minority Enterprise Development. Assistant administrators handle International Trade; Native American Affairs; Veterans Affairs; Women's Business Ownership; and Size Standards, and Technology. There is an associate deputy administrator for Government Contracting and Minority Enterprise Development. These offices are then the backup and resource for over 68 field offices that administer the programs and monitor loans. The Inspector General Office audits and maintains the integrity of the loans and the SBA programs.

[edit] History

The SBA was established on July 30, 1953, by the United States Congress with the passage of the Small Business Act. Its function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Also stipulated was that the SBA should ensure a "fair proportion" of government contracts and sales of surplus property to small business. This was accomplished primarily through the Small Business Innovative Research program and government "set-asides."^[2][3]

The SBA also makes loans directly to businesses and acts as a guarantor on bank loans. In some circumstances it also makes loans to victims of natural disasters, works to get government procurement contracts for small businesses, and assists businesses with management, technical and training issues.

The SBA has directly or indirectly helped nearly 20 million businesses and currently holds a portfolio of roughly 219,000 loans worth more than $45 billion making it the largest single financial backer of businesses in the United States.^[2]

The SBA has survived a number of threats to its existence. In 1996 the then newly Republican-controlled House of Representatives planned to eliminate the agency.^[4] It survived and went on to receive a record high budget in 2000.^[5] Renewed efforts by the Bush Administration to end the SBA loan program have met congressional resistance, although the SBA's budget has been repeatedly cut, and in 2004 certain expenditures were frozen.

[edit] SBA Loan programs

The most visible elements of the administration are the loan programs it administers. The SBA itself does not grant loans with the exception of Disaster Relief Loans. Instead, the SBA guarantees against default certain portions of business loans made by banks and other lenders that conform to its guidelines. Disaster Relief Loans are issued directly from the SBA.

Contrary to popular belief, these programs are not generally for persons with bad credit who can't get bank loans, nor are they primarily used for startup funding; rather, the primary use of the programs are to make loans for longer repayment periods and with looser affordability requirements than normal commercial business loans. Also, a business can qualify for the loan even if the yearly payment would be the same as the previous year's profit, whereas most banks would want payment for a loan to be no more than two-thirds (2/3) of the prior year's profits for a business. The lower payments, longer terms and looser affordability calculations allow some businesses to borrow more money than they could otherwise.

One of the most popular uses of SBA loans is for commercial mortgages on buildings occupied by a small business. These programs are chosen because most bank programs, while having similar payments and rates, require borrowers to refinance every five years.

Types of Guaranteed Business Loans through banking institutions include:

• Loan Guarantee Program: The 7(a) Loan Guarantee Program are designed to help small entrepreneurs start or expand their businesses. The program makes capital available to small businesses through bank and non-bank lending institutions.

• 504 Fixed Asset Financing Program: The 504 Fixed Asset Financing Program is administered through non-profit Certified Development Companies throughout the country. This program provides funding for purchasing land or construction. Of the total project costs, a lender must provide 50% of the financing, a Certified Development Company provides up to 40% of the financing through a 100% SBA guaranteed debenture, and the applicant provides approximately 10% of the financing.

• MicroLoan Program: Available for up to $35,000 through non-profit, micro loan intermediaries, to small businesses considered unbankable in the traditional banking industry.

• Economic Development Program: SBA partners such as SCORE and the Small Business Development Centers (SBDC's), operating in each state provide free and confidential counseling and low-cost training to small businesses

• 8(a)-Business Development Program: Assists in the development of small businesses owned and operated by individuals who are socially and economically disadvantaged.

Homeowners are eligible for long-term, low-interest loans to rebuild or repair a damaged property to pre-disaster condition. Before making a loan, the SBA must establish the cost of repairing or rebuilding the structure (which is determined by SBA's Loan Verification officers who visit the property), applicant's repayment ability (determined by applicant's credit worthiness and income) and whether the applicant can obtain credit in the commercial market (called the credit elsewhere test). Applicants who do not qualify for disaster assistance loans are then referred to the Federal Emergency Management Agency (FEMA) for grants. Although SBA says it won’t decline a loan for lack of enough collateral, the agency is statutorily required to ask for whatever collateral is available including the damaged property, a second home or real estate.

Businesses are also eligible for long-term, low-interest loans to recover from a nationally declared disaster. The means testing used by the SBA seems variable as a recovering business may be eligible for a smaller loan shortly after a disaster, but if the company has not substantially recovered within a short period of time and within the window in which Disaster Loans are still available for that area, the business may be granted a subsequent loan from the SBA for a greater amount. Similar to the homeowner's loan program mentioned above, a small business owner must pledge all their personal assets and acquire a similar pledge from a spouse or partner in the ownership of any shared assets. If defaulted on the loan the spouse or partner must surrender their value in the asset(s). The total value of an applicant’s assets is not considered by the SBA therefore a company may be approved for a loan regardless of if that person has little or great net worth.

Once an SBA guaranteed bank loan is approved, the SBA may mail closing documents to the applicant for signature. Disbursements may include an initial unsecured amount of $10,000 and subsequent disbursements pending upon construction progress and continued insurance coverage. After final disbursement, the loan is transferred to the SBA's Office of Capital Assets for management and servicing or collection in the case of default.

Disaster Relief Loans can take many months to be approved. Often forms that are submitted to the SBA must travel to multiple locations and all information provided to them must be verified before any funds are disbursed. This delay in funding can often result in damage to the businesses cash flow, credit and ability to maintain the level of revenue required to repay the loan. The SBA solely determines the amount of the loan they will approve for a business and the business will not be notified of the amount of the loan until one to two business days before the funds are received.

If a business which has a current Disaster Relief Loan defaults on the loan and the business is closed, the SBA will pursue the business owner to liquidate all personal assets. The IRS will withhold any tax refund expected by the former business owner and apply the amount toward the loan balance. After taking possession of all personal assets, the SBA may not pursue the former owner for many years allowing the person to rebuild their personal assets then will renew collection proceedings through a contracted collection agency.

[edit] SBA Loan Industry

The SBA loan industry can be divided into distinct categories:

• The largest United States Banks, such as Bank of America and Wells Fargo, generate the bulk of their SBA loan volume by the loans, especially the express loan and line of credit, being offered to those who would be declined for a normal bank loan due to factors such as length of time in business or slightly stricter affordability factors. These banks have sophisticated computer systems that generally makes this process seamless, and are quite different from other financial instiutions who utilize SBA lending for separate and distinct purposes

• SBA loans are used heavily by banks of all sizes to finance the purchase or construction of business owner occupied real estate (ie. real estate purchased by a business). Many banks only offer SBA loans for this purpose. In particular, they are using to finance properties that the bank would consider too risky to finance on their own, due to them being of a special or environmentally risky nature that can make their resale value limited; these properties include Motels, Gas Stations, and Car Washes.

• SBA loans are also used to allow individuals to buy existing businesses. Since, unlike in real estate transactions, commercial lenders are allowed to pay a referral fee to business brokers who help people buy and sell businesses, this segment of the industry is dominated by smaller banks and standalone finance companies who engage in this practice.

[edit] SBA Secondary Markets

The primary reason that SBA loans are so profitable to banks is that the SBA has created an infrastructure whereby the portions of 7(a) loans guaranteed by the agency can be transformed into AAA rated government bonds. The entity created for this purpose is known as "Colson Securities Corp." An illustration of this is as follows:

1. A bank makes a 1 million dollar loan for a person to buy a franchised gas station using the 7(a) program 2. The interest rate charged is the prime rate + 2.75% 3. The SBA guarantees 75% of the loan (in this case 750 thousand), so that if the borrower doesn't repay and even if the property can't be sold for anything, the lender would get back 75% of their funds 4. The lender can sell the guaranteed part of the loan as bonds using several intermediary companies and Colson Securities. Since the interest rate for risk free bonds can be as much as 5 percent less then the loan interest rate, the bank can effectively keep the difference by selling the loan for 825 thousand, and is also able to skim about 0.25 to 1 percent of the annual interest payments on this portion, so that the bond buyers essentially get paid the same interest rates as other risk free bonds. Thus the bank keeps 75 thousand and earns some residual interest. 5. The bank is left with 250 thousand at risk. If the borrower fails, the bank keeps 25% on a pro-rata basis of what the bank can collect from selling the property. Thus the annual ongoing interest earned on its 250 thousand is about prime + 4% (because of the skim) and the bank keeps the upfront gain on the sale of the guaranteed portion, representing an earning of almost 30% on the 250 thousand at risk. In addition, the bank can sell this portion of the loan to banks such as Bank of the West and Zion's Bank so as to have no money at risk.

After these developments, banks created operations for the first mortgage portions of SBA 504 loans to be bought and sold as bonds. While these bonds have no guarantee they are only likely to lose much money only if the value of the properties used as collateral declines more than 50 percent. Usually these loans are sold at a 4% premium, primarily to the same banks that also purchase sba 7(a) ungauranteed portions.

Recently however the funds earned from selling loans has decreased due to both the subprime mortgage crisis causing upsets in the bond market, as well as the fact that it appears SBA loans are being paid off more quickly then normal.

[edit] Small Business Investment Companies (SBICs)

One of the first steps toward a professionally-managed private equity and venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the SBA to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. Additionally, it was thought that fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union. Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U.S. economy was and still is the main goal of the SBIC program today.^[6] The passage of the Small Business Investment Act of 1958 by the federal government was an important incentive for would-be venture capital organizations. The act provided venture capital firms structured either as SBICs or Minority Enterprise Small Business Investment Companies (MESBICs) access to federal funds which could be leveraged at a ratio of up to 4:1 against privately raised investment funds. The success of the Small Business Administrations efforts are viewed primarily in terms of the pool of professional private equity investors that the program developed. In 2005, the SBA significantly reduced its SBIC program and although SBICs continue to make private equity investments, the rigid regulatory limitations minimize the role of SBICs.

[edit] Criticism

Businesses applying for SBA loans are supposed to be ineligible for financing elsewhere, as the applicant bank affirms. Designed to avoid direct competition with banks, this provision allows the most promising projects to be funded by the private sector, leaving higher risk projects to be picked up by the government, resulting in the government holding a higher share of non-performing loans. Though it accepts higher risk, most SBA borrowers pay their loans, the same loans that lenders affirm could not receive credit elsewhere. The Agency has traditionally had a currency rate on its loans of 90% or more, not meaningfully worse than banks.

Others have attacked the SBA as a fount of corporate welfare. Despite its expenditures, the SBA aids only 0.4% of the entrepreneurs in the United States, if one includes all manner of home-based businesses like lawn-mowing services or quilting or snow shoveling. However, it is consistently the greatest provider of small business credit in the country; not all small businesses seek credit or counseling every year.

The SBA is also one of very few agencies that pays its own way and does not drain the treasury for its loan programs. Price Waterhouse affirmed, some years ago, that the tax revenue generated by only a handful of SBA startup loans more than paid all the operating expenses for the Agency.

One of the primary uses of SBA funding is for business owners to get a loan to buy the property their business occupies. Owning the property and having the business rent the property from the owner is a form of a tax shelter, so the SBA is criticized for aiding tax shelters.

Various banks are often criticized for offering or writing fewer SBA loans proportionally than other banks, which critics see as a sign of discrimination. However, others counter that SBA loans are equivalent to or many times worse than what the banks offer themselves, so a customer of that bank might choose the normal bank product more often than their SBA product.

The SBA has most recently been criticized for the manner in which it disbursed loans earmarked for businesses directly affected by the September 11, 2001 attacks. Lax oversight resulted in widespread abuse of the program as the low-interest loans were awarded to unaffected business including "Dunkin' Donuts shops and florists...motorcycle dealers and chiropractors...a South Dakota country radio station, a Virgin Islands perfume shop and a Utah dog boutique," many of them unaware of the special program.^[7]

The events of 9/11 had a broad reaching impact on the US economy and the US Government had determined that specific industries as a whole were affected such as the Airline and Cruise industry. Travel by both means dropped dramatically. Two of the five largest cruseline operators in the US went out of business as a direct result of the events of 9/11. One of the two largest operators cut their shore-side operating budget by 40% for an unspecified period of time. Although abuses of the SBA Disaster Loan program are expected or known to have occurred, companies such as a tourist based business in the US Virgin Islands would have been substantially damaged and may have gone out of business if not for the program.

[edit] See also

• Federal grant
• HUB Zone
• SBA 504 Loan
• Service-Disabled Veteran Small Business
• United States House Committee on Small Business
• United States Senate Committee on Small Business and Entrepreneurship
• New York State Small Business Development Center
• Wyoming Small Business Development Center SBDC

[edit] References

[edit] External links

• Official site
• SBA History
• American Small Business League
• Grant center federal grant guide.