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The SBA's New Master

By Seth Martin
June 20, 2006

Washington D.C. - The U.S. Small Business Administration has taken it upside the head lately.

The beleaguered agency, which guarantees loans and runs educational programs on behalf of some 25 million small businesses, has seen its budget shrink by a third, to $624 million, since 2001. And buffeted by attacks over the glacial administration of disaster loans in the wake of Hurricane Katrina, head SBA administrator Hector Barreto stepped down in April.

Making matters worse, this year's Small Business Reauthorization Act--which would keep the agency afloat for the next four years--is mired in Congress thanks to some 50 amendments proposed by House Democrats. Republicans rejoined last week with a last-minute proposal to repeal a policy that prevents big firms from using franchises as fronts to obtain small-business contracts.

Into the breach steps Steven C. Preston, former head of strategic acquisitions at lawn-care giant ServiceMaster (nyse: SVM - news - people ). Supporters say that ServiceMaster's franchising model gives Preston a feel for financing small businesses, while critics find it unlikely that a corporate executive would have much empathy for entrepreneurs. Preston's confirmation hearing is scheduled for tomorrow.

"If Preston is approved, he will likely foster policies that will act as barriers to small firms doing business with the federal government and continue to allow awards to Fortune 1000 companies to be reported as small-business contracts," says watchdog Lloyd Chapman, president of the American Small Business League.

Todd Stottlemyer, president of the conservative National Federation of Independent Business, counters that Preston "has had invaluable experience in the credit and financing arenas as he worked to meet the needs of his small-business customers."

Whatever the case, Preston has one tough balancing act. Here are just some of the issues that need immediate attention:

-- Disaster Relief. Traditionally a guarantor of small-business loans, the SBA also acts as a direct lender in times of disaster. In the summer of 1994, it made $2.1 billion in loans to 64,500 applicants after four hurricanes hammered Florida within two months.

The issue here is speed. In the first three months after Katrina, the SBA rejected some 80% of small-business loans, according to The New York Times (using figures provided by the SBA). The agency says it eventually approved 90% of all loan applications, for a total of $8.5 billion in loans.

Preston's job will be to find a way to get that money to devastated entrepreneurs more efficiently. (For a primer on securing SBA disaster loans this hurricane season, check out "An Entrepreneur's Disaster Loan Guide.")

-- Government Contracting. Democrats, led by Sen. John Kerry, D-Mass., and other left-leaning watchdogs want to increase the mandated quota for federal contracts to small businesses. Expect Preston to get grilled on this issue.

-- Loan Guarantees. Last year, the SBA did away with subsidies for its flagship 7(a) loan program, which guarantees the repayment (up to 85%) of $28 billion in loans to small businesses. Those subsidies helped to cover the program's loan losses, now supported by fees paid by borrowers. Not surprisingly, the SBA ended up raising the fees to make up for the potential shortfall--a strategy that doesn't sit well with Democrats, even as the agency is now guaranteeing ever-larger loan amounts.

-- Regulation Oversight. Given his corporate background, Preston will have to prove--to both parties--that he can work with other government agencies to shield small fries from disproportionately burdensome environmental and safety regulations.

Will entrepreneurs' grass get any greener under Preston's leadership? "It is time that this agency is finally managed by an individual who is truly dedicated and ready to meet the needs of our small businesses," says Nydia Velázquez, D-N.Y., the ranking Democrat on the House Small Business Committee. "Whether Mr. Preston is that person remains to be seen."



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