The SBA's Iffy Future

Critics and fans of the agency, which will soon have a new chief, envision different paths for the embattled Small Business Administration

Conventional wisdom has long held that small businesses are a crucial driver of the the nation's economy. Indeed, last week while on a visit to a Washington (D.C.)-area hardware store, President George W. Bush said: "Small businesses provide most of the job growth in our country. If the small-business sector is doing well, so is the American economy," according to the Associated Press. And Small Business Administration statistics show that the U.S. has 24.7 million businesses with fewer than 500 employees.

However, the SBA is an organization in transition. Lately, the words "embattled" and "beleaguered" have been used with frequency in describing both the SBA and its outgoing chief, Hector Barreto. Critics have charged President Bush with paying little more than lip service to the significant role that small businesses play, while weakening the SBA by significantly cutting its budget since he took office.

In April, Barreto announced his resignation from the SBA in order to head the Washington-based Hispanic business-advocacy group, the Latino Coalition. Appointed in 2001, Barreto, a California businessman, is the second longest-serving SBA administrator. But his tenure has been marked by much criticism, particularly regarding the agency's response to the hurricanes that devastated the Gulf Coast last year, as well as its handling of economic disaster-recovery loans to small businesses following the September 11 terrorist attacks (see BW Online, 2/2/06, "The SBA Chief Comes Out Swinging").


Steven Preston, an executive vice-president for Illinois-based ServiceMaster (SVM), has been tapped by the White House to take over as the head of the SBA, pending Senate confirmation (see BW Online, 4/26/06, "A Storm Brewing at the SBA?"). He faces numerous challenges, including growing apprehension about the SBA's future.

In April, Senator Tom Coburn, (R-Okla.), who chairs a subcommittee on federal financial management, created a wave of anxiety when he scheduled a hearing in which two witnesses, including the American Enterprise Institute's Véronique de Rugy, publicly advocated abolishing the SBA. De Rugy has continually challenged the organization's existence (see BW Online, 12/19/05, "A Talk With a Small-Biz Heretic"). And on May 11, Democrats on the House Small Business Committee plan to introduce a bill that would overhaul the agency.

Complaints about the SBA's management response to Hurricane Katrina stem from the chaos and backlog of loan applications following the Gulf Coast disaster. Months after the hurricane swept through the coast, there was a severe backlog of loan approvals, with many loans yet to be dispersed. And the agency had to employ several thousand additional employees to field and process loans. However, Barreto and the agency currently assert that it has subsequently approved nearly $9 billion in disaster-relief loans. Moreover, the agency came under fire after a number of reports that many businesses not directly impacted by the September 11 attacks received loans earmarked for victims.


Lloyd Chapman, founder and president of the American Small Business League, a Petaluma (Calif.)-based federal small-business policy-watchdog group, is a vociferous, longtime critic of the SBA. Chapman has called the Bush Administration particularly hostile toward small businesses, and he has filed a number of lawsuits against the agency for creating policies and diverting contracts away from small businesses to large corporations (see BW Online, 1/27/06, "Is the SBA Hurting Small Business?").

Asked about the future of the agency, Chapman says: "I don't think that Bush nominated Preston to run the SBA but to potentially continue to dismantle the SBA. He's qualified to dismantle it, not to run it.

I will stick to my guns and say that Bush wants to dismantle all federal programs for small business. There have been six consecutive years of budget cuts."

A slew of criticism erupted in February, following the President's fiscal-year 2007 budget request for the SBA. While the request of $624 million is an increase of $31 million over last year's initial request of $593 million, it amounted to about a 41% cut to the agency's budget since Bush took office. The proposed budget, which is still pending approval, includes increases for the cost of disaster loans for homeowners and businesses by eliminating the low interest-rate cap.


It also increases the cost of small-business loans by charging borrowers higher fees on loans of $1 million or more, while eliminating funding for the SBA's largest loan program -- the 7(a). Also, the budget effectively undercuts loan programs that proportionally serve the most minorities and women out of all the small-business assistance programs. The proposal also slashes a number of training and counseling programs.

When the budget proposal was released, Rep. Nydia Velázquez (D-NY), a top Democrat on the House panel that oversees the SBA, voiced some serious concerns to BusinessWeek Online. "When the President was campaigning five years ago, he was always talking about small business and the important role it plays in our economy," she says. "[But] he says one thing and does another. In the last four years, the President has cut the budget by almost 60%. While he has repeatedly touted his commitment to small business, this budget does not present to us a President dedicated to improving the environment to small business."

As Hector Barreto's days as chief of the SBA wind down, Barreto sees his time at the agency as a success. "I am leaving the SBA [knowing] that we have been doing more loans than ever in its 53 years," he says. "I am leaving the SBA having trained more small businesses than ever. The SBA has facilitated $70 billion in contracts for small businesses, 40% more than before ... When I am gone, the legacy I leave is an all-time record in every one of our programs."

What all sides of the SBA debate can agree on is that when small businesses thrive, so does the U.S. economy.

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