In 1953, President Eisenhower signed legislation that created the Small Business Administration, an agency designed to "aid, counsel, and assist" mom-and-pop outfits in the face of the large-scale industrial consolidation that followed World War II. In the 50 years since, the SBA has grown into an agency with a 2003 budget just shy of $1 billion, and the authority to guarantee entrepreneur loans amounting to some $9.6 billion. While that's chump change to Uncle Sam, the SBA has become a favorite target of budget hawks, who say it costs too much for what it delivers, and who also complain that its loan-guarantee program is unwieldy. To top it off, big companies still land the bulk of government contracts.
Administrator Hector V. Barreto is trying to change all that by making the SBA more responsive to smaller businesses. The Kansas-City born son of a Mexican restaurant owner, Barreto moved as a young man to Los Angeles, where he founded an insurance and financial-services company. A self-described foe of affirmative action, he instead embraces President Bush's call for more "affirmative access" to federal aid and education for moms-and-pops of all stripes. And he notes that the fastest growing small-business segment is Hispanic-owned (click here for a video interview with Baretto).
"There's an old saying in business that I can take a 'yes' and I can take a 'no', but a 'maybe' kills me," Barreto said in a May 27 interview with BusinessWeek editors and reporters in Washington. "In the past," he added, "there were too many maybes, so we're trying to eliminate as many of those maybes as possible."
One of his top initiatives: "Match-making fairs" that certify small businesses, then introduce them to purchasing officers from government and industry. February's match-maker in Orlando attracted 80 big purchasers, public and private. He expects the next conference, set for June 16 and 17 in Chicago, to be even bigger. "There's a lot of bureaucracy and, sometimes, mystery, when it comes to doing business with the government," Barreto concedes. "We're trying to simplify that and make it easier for small business to get access." What follow are edited excerpts from the discussion:
Q: The massive tax bill signed on May 28 by President Bush will provide a short-term boost for small business, but its benefits will phase out in a few short years. Doesn't that create what small business hates most of all: uncertainty?
A: I choose to look at the glass as half full. We're happy so much of that tax cut was front-loaded, so small business will get immediate benefit Eighty percent of lowering the marginal tax rate will accrue to small biz -- at least 23 million small businesses are estimated to get at least $2042 back, [and] some will get more than that. [But] it's unpredictable what's going to happen with tax rates, we'll have to see A lot of small business, because of the uncertainty, will delay making purchases.
Q: With the increase in government spending on defense and homeland security, where are the opportunities for small business?
A: One of the problems is that government has been bundling contracts. As a small business, you might be able to do only a piece of a contract, or it's going to exclude you. Another problem is understanding the processes and different agencies. There's a lot of bureaucracy and, sometimes, mystery. We're trying to simplify that and make easier for those small businesses to get access. The old excuse from government agencies was, 'We can't find them [small businesses]!' We're solving that problem. [Still], you've seen a precipitous decline in the number of companies who are getting those contracts.
Q: The Federal Reserve is raising the prospect of deflation, which would be a double-whammy for small businesses, which are always the first to lose pricing power and the last to get it back. What can the government and SBA do?
A: Obviously deflation is badand small businesses don't have purchasing power. They deal with small margins, and they don't have a lot of room to navigate. Obviously that's something that's still on the horizon, I don't think it [deflation] is happening on any kind of wide scale here, at least we haven't seen it.
Q: What is happening to your default rate?
A: It's not much more than what you're going to see from traditional banks and their normal loan programs. We do so much due diligence. The default rate has been consistent, I have not seen it increasing. Also, we're doing a lot more of these $10,000, $20,000, $50,000 loans. They're easier to manage, easier to pay back. We haven't seen a big problem with defaults.
Q: You have endorsed a congressional plan that would allow trade groups to offer health insurance to small businesses -- so-called association health plans (AHPs). State regulators, including the Natl. Assn. of Governors, say the plan's solvency requirements and oversight mechanisms are lax. Insurers predict that these groups will cherry-pick, providing coverage for companies with younger, healthier demographics. How do you address these concerns?
A: I agree with Senator Jim Talent (R-Mo.), who says the cherry-picking is going on right now by the insurance companies [as to] which small businesses get health care and which small businesses can't get health care. Small businesses are being devastated by the kinds of rate increases that they're getting. Forty percent of all people who are uninsured either work for a small business or have a spouse who works for a small business. They ought to be able to pool together so they can have the best rates and the best benefits. AHPs aren't going to solve the whole problem, but they begin to address the problem of access.
Q: The chief criticism of the SBA under the Bush Administration is that the agency is talking the talk, but not walking the walk. SBA is no longer a Cabinet-level agency. And for all the benefits expected to accrue to small biz in the tax bill, it gives to the big companies and the wealthy, and the benefits only trickle down to small business. What do you say to these critics?
A: I have a lot to say to those critics. We should be judged by our results. You always look at the bottom line. First, we've never been a Cabinet-level agency. The previous administrator did participate in Cabinet-level meetings. This Administration decided it wanted a much smaller Cabinet. But I have felt very, very supported by President Bush. He's spent a lot of time on these issues.
Our bottom line isn't revenues or profitability. It's how are we doing in terms of providing access to capital to small business? We're up 35% this year overall in the total number of loans -- it averages about $10 billion a year -- and that's what we're tracking right nowand that doesn't include disaster loans or venture capital.... We're up 35% to women-owned business, we're up 45% to Hispanic-owned biz, we're up 75% to African-American business, we're also up 35% to Asian-owned business. We're doing pretty darn good. This year, we'll have our best ever in terms of loan activity. It's good timing, because it's our 50th anniversary. Our Web site gets 1.5 million visitors every single week. It's a new and updated Web site. It's our intention in the future that many of the programs we offer can be accessed on the Web.
SBA is changing. I agree with you. In business all my life, I'd think, 'Oh, a government agency, do I really want to do business with it?' So one of my goals was to change the perception of the SBA. We want small businesses to think of us as a partner, as a small-business resource.
Q: The SBA women's procurement program. Some critics complain it has too low a profile now?
A: I think we have a very high-profile champion starting with the President. He announced his small-business agenda at a women's economic summit. He said it's increasingly becoming a women's world when you talk about small businesses, and it's true. Forty percent of all businesses in the U.S. are women-owned businesses. Our deputy administrator is Melanie Sabelhaus. She's a passionate advocate for small business. But we're not going to measure ourselves by our rhetoric. It's what we are getting done. I'm pleased with the progress we're making.
Q: In 2000, some 4,100 businesses received privately-issued SBA backed funding of about $5.4 billion through the New Markets Venture Capital Program. Last year, more businesses -- 4,257, according to your agency -- collected $3.7 billion. More applicants. Less cash. What's going on? Is the program stalled?
A: No, the program isn't stalled. Let me define this better: This program was initiated by the previous Administration [and] intended to reach out to new markets, specifically minority markets. It's a pilot program, not a permanent program. And we are going through that pilot. The initial response we got from that program wasn't as positive as we would have liked. The response was so low that we had to extend the deadline so more companies could bid. Now that window is closed, so we can't force people to apply for more capital.
But our commitment to reach out to these emerging markets hasn't changed. We are reaching out. I've brought in a person to develop more outreach to women, to African-Americans, and Hispanics.
Here's another issue: This program is less advantageous than our regular venture-capital program -- the leverage is much lower on the new program. We have reached out to NASBIC (National Association of Small Business Investment Companies), and asked them to work with us, with experienced leadership, and start looking at some investment opportunities in these emerging markets. NASBIC is the Cadillac program. We want more people to apply with the Cadillac program.