The Shrinking SBA Budget Doesn't Faze Many Firms
By James M. Pethokoukis
February 27, 2006
You know the old quip about Uncle Sam: There's nothing scarier than hearing someone say, "I'm from the government, and I'm here to help you."But the folks at the Small Business Administration are all right with Kevin Harberts. He's CEO of Iowa Metal Spinners, a metal-products company housed in a 105,000-square-foot facility in Cedar Falls, Iowa. Were it not for a $1.3 million SBA-guaranteed loan in 2000, Harberts's company would still be stuck in cramped facilities--and probably turning away business.
"Without the SBA, I seriously doubt the expansion could have happened, and I don't think we would be where we are today," he says. The company was making a profit but plowing it all back into equipment and inventory. Since the big move, employment has more than doubled to 65, and annual sales have quadrupled to more than $7 million.
Harberts's story is the kind that some small-business advocates fret there will be less of in the future because of SBA budget cuts.The agency's 2006 budget is $456.5 million, down a third since 2001. And while President Bush has proposed increasing the SBA's 2007 budget to $624 million, $195 million of that is for disaster spending. So proposed nondisaster spending is actually a $27.5 million reduction, including elimination of its microloan program. In addition, Bush is proposing higher borrower fees on guaranteed loans of $1 million or more, although the budget does increase the SBA's lending authority to $28 billion. Rep. Nydia Velazquez, a New York Democrat and ranking member of the House Small Business Committee, calls the proposal an "attack on this nation's entrepreneurs."
Well, maybe it's a sneak attack, because few entrepreneurs seem to have noticed. Michael Donohue of the National Federation of Independent Business says the SBA cuts seem to be a nonissue for its 600,000 members. "Most don't like taking on new debt, and it's often not very practical for them," he says.
This doesn't surprise Jim Schell, an entrepreneur and small-business consultant in Bend, Ore. "The first choice of entrepreneurs is always to do without the SBA," he says. "They don't want to go through the paperwork, and the loans aren't inexpensive."A 2003 survey of Inc. magazine's 500 fastest-growing private companies found that 80 percent of their start-up funds came from personal funds or acquaintances. SBA-backed loans accounted for only 2 percent.
The SBA will typically guarantee between 75 and 90 percent of a loan's value. And without that backing, these loans probably would not get made. That certainly was the case with Harberts. Sans the SBA, says Jed Ellerbroek of Community National Bank in Waterloo, Iowa, "it would have been really hard to make the loan." But there is a downside: Because of the SBA guarantee, explains former dot-commer Martha Gershun, banks have little incentive to work with owners if they can't make their payments on time. "So they just call the loan right away," says Gershun, who has taught entrepreneurship at the University of Missouri-Kansas City and now runs a nonprofit called Reach Out and Read.
Shuttering the SBA has long been a pet cause of free-market think tanks, and some small-business advocates, like Lloyd Chapman of the American Small Business League, think Bush wants to "slowly starve" the agency to death. In any case, Gershun thinks SBA money may be better for expanding companies than for start-ups: "If you are not strong enough to borrow money under conventional terms," she advises, "then you probably should not be doing this."