The inspector general of the Small Business Admin. assures Sen. John Kerry (D-MA) he has found "very few instances where a large company falsely certified it was small." But a regulation, proposed nearly two years ago to make it easier to catch any fraud languishes at SBA.

In mid-2003, Joe Rosario tried to get a small-business loan of under $25,000 to help make ends meet at his popular cafeteria-style restaurant in downtown Manhattan. Though Rosario's Italian Bistro is packed on weekdays for lunch, business has dropped by 50 percent after 9/11 and has never bounced back, he says. JPMorgan Chase initially rejected his loan application, but after getting help from the Small Business Administration, he was able to obtain a smaller loan, though he declined to divulge the sum. But he was happy to share his opinion of banks. and "I hate banks, and " he says. and "I don't have anything good to say about banks."

Later, he acknowledges he really just hates big banks. The problem, he says, is there are no small banks nearby in the Financial District. Though a Washington Mutual branch, which is his personal bank, is about a mile from his restaurant, that's too far for his daily treks to fetch cash. For his business account, he needs proximity.

While many bankers talk about understanding small-business customers' needs, many don't bother, say frustrated small-business owners. While Rosario was interviewed as part of an unscientific survey, several owners echoed his plight Banks don't do enough to help small businesses. And even when they try, many just don't get it.

Conversely, bankers point to a more competitive marketplace for small- business loans. Indeed, margins on these loans have narrowed more than overall corporate loans, indicating increasing competition, says Charles Saeman, president and CEO of Wisconsin-based State Bank of Cross Plains and head of the lending committee of the Independent Community Bankers of America. Margins on his bank's small-business loans fell 100 basis points in the past two years, while his overall loan portfolio has seen a 75 bp falloff.

Even with that lower profitability, small business is a strong niche for Cross Plains. and "It's near and dear to our hearts and our balance sheet, and " he says, noting that small-business lending accounts for half the bank's total loans. The bank had 902 small-business loans outstanding as of June, worth a total $108 million. That's down from the previous year, when the bank had 945 outstanding loans worth $114 million. Robert Beers, assistant cashier at the bank, says he expects the volume to bounce back in 2005 if the economy improves.

Saeman attributes the downturn in small-business loans to higher competition, and emphasizes that small-business lending is a major component of Cross Plains' strategy. That's because a small-business loan, handled well, can prompt owners to buy other business services, like cash management and payroll deposits-and even encourage their employees to open savings and checking accounts.

In fiscal 2004, the SBA guaranteed a record 82,492 loans totaling $17.6 billion, and the agency says it expects to surpass that mark this year with a projected $22 billion in guarantees, a rise of 25 percent. In fiscal 2003, there were 74,185 SBA loans totaling $14.5 billion. Ten years ago, there were 40,372 loans totaling $9.6 billion.

So with banks competing for these loans and federal money flooding the market in SBA guarantees, why are small-business owners still frustrated?

Lloyd Chapman believes he has the answer. Chapman, the president of independent advocacy group American Small Business League, says the SBA's definition of small business does not accurately reflect the spirit of entrepreneurship. The agency considers companies with up to 500 employees a small business, which Chapman says is too high to constitute a true small business. Indeed, that threshold defines the vast majority of the U.S. economy as small businesses. Of the 5.8 million businesses in the U.S., only 17,000 have more than 500 employees, says Bruce Phillips, senior fellow of regulatory studies at the National Federation of Independent Business Research Foundation.

The SBA is weighing a proposal to drop that threshold to 100 employees, and has recently extended the comment period until April 3. Chapman says he fully supports this initiative and would ideally like to see the bar set even lower. He says this would align the SBA's lending programs and help true small businesses to get the loans they need. The agency was unable to provide a breakdown on borrower size to determine which size companies benefit most from SBA loans.

Chapman also argues that, due to corporate acquisitions, large companies are actually getting federal contracts earmarked for small businesses. He has sued the SBA to get more complete data, but in the meantime he has convinced some in Washington that he's on to something. In January, Sen. John Kerry wrote to the SBA citing a report from the agency's Office of Advocacy that concluded that 44 companies considered and "other than small and " received more than $2 billion in federal contracts earmarked for small business. The SBA recently passed a rule, applauded by advocates, limiting a company's eligibility for federal contracts once it is acquired by a larger company.

Another concern voiced by small-business owners is the sheer complexity of dealing with bank paperwork.When a vet was opening up her practice in New York three years ago, she applied for a $500,000 business loan from Chase. The vet's practice director says the bank did not understand the veterinary business and made her jump through and "hoop after hoop after hoop. and " Frustrated, the business owners finally walked away and went to Vine Street Financial, an Atlanta-based division of BB and amp;T that specializes in originating loans for five industries, including vets. Its other areas of specialty are assisted living/Alzheimer's care facilities, child-care facilities, dentistry practices and hotels and motels. Having a bank that really understands the business-and not just giving it lip service-has been invaluable, she says. Chase could not be reached for comment.

Do small businesses fare better with small banks? Indeed, an SBA report last year concluded that small businesses receive less credit on average in regions where the largest banks held a large share of total deposits. As of 1999, the most recent year available, small-business loans accounted for 25.5 percent of assets of banks with less than $1 billion in total assets, whereas larger banks dedicated just 7.85 percent to small-business loans. Furthermore, the report said that if large banks acquire small banks, and if those percentages hold, the amount of credit available to small businesses could actually plummet.

That said, there are some large banks making real efforts. Small-business advocates cite Wachovia and Bank of America as being especially proactive. Will Howle, director of small-business and private-advisory banking at Wachovia, says that focus groups conducted last year produced some surprising results. Small- business owners talked almost exclusively about the importance of the branch experience, he says. In that respect, he says small-business owners are closer to retail customers than larger business customers and that seems to have been lost on some big banks.

Time is the most important commodity for small-business owners, both in terms of getting out of the branch quickly and getting a loan rapidly, Howle says. For most small businesses, 30 days is too long to wait for loan approvals, so Wachovia's branch-based small-business specialists are trained to make loan decisions on the spot. Bank of America did not return phone calls seeking comment.

Sometimes, small-business owners' needs are just too small for a bank to notice. It's difficult to get a bank excited about loans under $50,000 or so, given all the due diligence required to process them, says William Grinker CEO of Seedco, a community-development group. That hasn't stopped Anne Arvia, president of ShoreBank in Chicago. Her bank's $250 million portfolio of small-business loans generates a five percent ROE, and she insists the bank can hit 10 percent this year, she says. ShoreBank focuses exclusively on tough neighborhoods in Chicago and Detroit, whose businesses have largely been neglected by other banks.

She agrees that small business loans are expensive to service, and admits there is a lot of cherry picking among banks looking for the best creditors. But banks need to do more to develop a good portfolio of their own, she says. Too many banks simply rely on FICO credit scores to determine creditworthiness of new small-business owners-instead of individually analyzing each request. In fact, ShoreBank does just that, and is now developing its own credit-scoring system, she says.

Are small businesses actually getting all the government contracts they should? No, according to a recent report by the Small Business Administration Office of Advocacy, which is raising hackles in the small-business community and on Capitol Hill.

Required by law to dedicate up to 23 percent of their procurement spending to small businesses, federal agencies specifically set aside many contracts just for that purpose, and say they fulfilled these contracts as proof of meeting their goals, or at least coming close. These claims, in turn, allow politicians to brag about their commitment to American entrepreneurs, among the most coveted segments of the electorate.

But the report, released in December, found numerous instances of data "miscoding" during fiscal 2002 whereby divisions, affiliates and subsidiaries of a number of large companies - including Raytheon and Titan - were listed as small. That allowed them to obtain more than $2 billion in federal awards that were supposed to have gone to small businesses, and to be mistakenly included in federal small-business procurement statistics.

For years, small-business owners have complained of such doings, which have been documented before but with different data. In 2003, for example, the General Accounting Office released a report detailing thousands of instances where large businesses received small-business contracts. Another study, published last year by the nonprofit Center for Public Integrity, found that 30 percent of defense contract dollars supposedly awarded to small and minority-owned businesses had gone to giant defense contractors during a recent five-year period.

How could this have happened?

"Big business runs the government, and they get what they want," said Lloyd Chapman, the founder of an advocacy group called the American Small Business League, who thinks that "blatant fraud" underlies the awarding of small-business contracts to large companies.

Members of Congress have also weighed in, including Congresswoman Nydia Velázquez, the ranking Democratic member of the House Small Business Committee, who said that the Bush administration was "cooking the books" with small-business statistics. For his part, Senator John Kerry, her Senate counterpart, accused the Small Business Administration last month of lax enforcement and called for an investigation of fraud.

Of course, not everyone contends that the mistakes are necessarily deliberate or a result of fraud. Paul Murphy, president of Eagle Eye Publishers in Fairfax, Va., which prepared the report for the Office of Advocacy, blamed the problem mostly on confusing rules and procedures. The system is so complicated that it invites mistakes, he said.

When a business wants government contracts, it generally must register with a central database, the Central Contract Registration, which is maintained by the Department of Defense. The General Services Administration also maintains schedules of approved vendors that include data on size.

In each case, businesses provide information about their size, information that is verified only under certain circumstances. They also indicate what the business does by using a Census Bureau coding system. Since the definition of "small" - set by the Small Business Administration on the basis of employee size or annual revenues or both - varies by code, many businesses that have more than one code can be labeled small or large, depending upon which code is used in a bid.

The confusion is compounded by the fact that small businesses can grow, affiliate with larger companies or be acquired by them. In practice, many companies have kept their small-business designation after they could no longer be considered small for one of these reasons, even if the contract continued, by virtue of renewals, for 15 or even 20 years. That is apparently what happened in 80 percent of the instances uncovered by Mr. Murphy.

To try to end these kinds of mistakes, the Small Business Administration recently enacted a rule requiring companies to recertify as "small" if they are sold and their contracts are transferred to a new entity. According to Gary Jackson, the assistant administrator for size standards at the agency, the S.B.A. is also considering requiring periodic recertification for long-term or renewal contracts. That is something the General Services Administration demands already, said David A. Drabkin, its deputy chief acquisition officer, who also downplayed the idea of widespread fraud.

But size reporting mistakes can be devastating to small businesses, which do not have much recourse under the present system.

Take the case of Stanley Pond, the owner of a two-person company in Berthoud, Colo., that manufactures calibration instruments. He lost an Air Force contract in 2003 to a business that he thought was too big to qualify. Mr. Pond filed a protest with the local S.B.A. office overseeing the contract. He lost, and appealed to the agency's Office of Hearings and Appeals in Washington.

He took a step that many other small businesses do not. Despite millions of annual government contract actions, only a trickle of size appeals ever get to the Office of Hearings and Appeals, according to its assistant administrator, Delorice P. Ford, who said that fewer than 90 cases reached her office in fiscal year 2004.

Even fewer succeed. Many are dismissed on procedural grounds, like Mr. Pond's appeal, which was thrown out before it could be determined on its merits.

In his case, the government official who had awarded the contract to his competitor made it known that she intended to leave it in place, regardless of any possible size mistakes. Since the Office of Hearings and Appeals has no power to stop a contract officer's actions, that technically made the appeal moot - even though a subsequent investigation by the S.B.A.'s inspector general found that the company awarded the contract was indeed too big, and never should have received it, a result that left Mr. Pond angry.

"They seem to have no interest in finding out what is really going on," he said of the S.B.A., denouncing the appeals process as meaningless.