How Not to Help Small Business

...It seems probable that Regan was motivated by more than simple family feeling...

...I emerged from that to secure an economic base that will serve my children and grandchildren well...

...Louis Laun, the SBA’s number two man, recalled that when the agency emerged from oversight hearings conducted by the House select committee in September 1973, they were filled with “euphoria...

...Ideally, Congress and the press should have devoted some attention to assessing SBA’s ability to deal with these kinds of problems...

...SBA Administrator Tom Kleppe, a former congressman from North Dakota, denounced the hearings as “McCarthyism” (a charge he later retracted...

...Gone, too, are the percentage discounts that used to be granted for’ prompt payment...

...If lucky, they might parlay this into an ambassadorship to Mauritania or at least a short term on one of the many honorific advisory committees that serve the State Department...

...Arthur Armstrong admitted, “New business lending is the toughest...

...In two days of hearings there wasn’t one tough question from either side of the aisle...

...For example, a respected group called the Small Business Washington Presentation recently conducted a survey that showed that 90 per cent of its membership “did not use, did not know about, and could not relate to the SBA programs...

...Even without a revival of the American entrepreneurial tradition, it has been estimated that if SBICs dispersed $1 billion annually, they wouldn’t come close to meeting the need...

...SBA represents the finest example of the American people wanting to have a free economy...

...Part of the problem is that most new enterprises need equity capital rather than direct loans...

...He was not too embarrassed to say, “I’m a man who came from nothing...

...This program peaked in 1965, however, and in fiscal year 1974 the SBA provided only $131.6 million in such loans...

...Compensatory Capitalism One focus of the hearings has been SBA programs for minority businessmen...

...The entire Portfolio Review staff, for example, was engaged in disasterrelated assignments from June 27 through September 30, and, as a result, there was no one free to investigate the Richmond office...

...Against this backdrop, it is unrealistic and rather unfair to expect a hapless and under financed government agency like the SBA to make a significant difference...

...One company is going down if they can’t get another emergency loan...

...it is one of the few appendages of the federal government that was not fathered by an activist Democratic President...

...When Warren said things like, “I’m here because I believe in the free enterprise system,” he was serious...

...There is also a problem of defining exactly what is a minority small business...

...For example, there was a $30,000 direct loan to the father of the district director’s personal secretary...

...One result of the charges swirling around the SBA loan programs is that it is now harder for a small businessman to get an SBA loan...

...Since the SBA is only the guarantor, the government has to actually pay out money only if the loans are defaulted...

...He contrasted the Indianapolis B oagffeinccey wwihtho swoemree a“foraldid-t itmoe rgso iinn ttoh ea B bank...

...For those searching for a quick fix, perhaps the most promising place to look is our much-maligned tax laws...

...To qualify for an SBA loan, a small businessman has to be turned down for a conventional loan by at least one bank (two banks in communities of 200,000 or more...

...In 1958 the SBA made a faltering start in the direction of providing venture capital by establishing Small Business Investment Corporations...

...Spontaneity at the SBA An example of the breadth of this culture gap is provided by a recent interview with Henry Warren, a 53-year-old retired pump manufacturer who recently took charge of the SBA’s management assistance program...

...Traditionally, small businessmen have been able to extend their rather limited working capital by taking as much as 90 days to pay suppliers...

...One reason that Regan’s activities had long gone undetected was that the SBA’s own Portfolio Review team consisted of just eight people (since expanded to 23) with the responsibility for overseeing 72 regional offices which were approving a total of 1,000 loans per day...

...It is unlikely that a significant portion of SBA loans will ever be put into forming new enterprises...

...In addition, Regan obtained two totally unsecured loans for $15,000 each from Virginia banks which were doing extensive business with his office...

...The beleaguered agency quickly showed its outrage...

...This question is particularly relevant in the case of banks, because in their dealings with the federal government, they invariably come out ahead...

...Many of the allegations centered around the efforts by Tom Regan, since dismissed as district director, to funnel more than $11 million in SBA loans and guarantees to a number of enterprises in which his brother-in-law, Joseph Palumbo, was involved...

...And despite the free enterprise myths that surround it, the stock market route is generally limited to large and medium-sized businesses trying to expand...

...Under this program, the SBA guarantees 90 per cent of the principal of small business loans that banks would be otherwise reluctant to make...

...The SBA’s ability to service small businessmen in search of loans is also undermined by the agency’s preoccupation with its other responsibilities...

...By now this kind of rhetoric should alert us to the real question: what’s in it for the private sector...

...Unlike the direct loans (with interest rates of 6.5 per cent), these guaranteed loans are at 11.25 per cent, close to the prevailing interest rates...

...Created in 1953 as the successor to Herbert Hoover’s ill-fated Reconstruction Finance Corporation, the SBA was designed to be both the government’s in-house advocate for entrepreneurship and as a lending agency to provide financing-albeit limited-for small businessmen who were shut out of conventional loan channe 1s...

...Reflecting the kind of illogic that often accompanies the assignment of governmental duties, the SBA is the federal agency responsible for making disaster loans to both homeowners and private businesses of all sizes...

...Rather than fearing that the SBA will adopt the cautious attitudes of the banking community, Louis Laun praised the program as “wonderful...

...In Laun’s words, these new hearings “hit us like a wet rag in the face...

...Outside of the minority area, SBA loan programs are geared toward the problems of existing small businessmen...

...But because of the focus on SBA corruption, the way the agency’s loan programs have deteriorated into just another federal subsidy for the banking industry has been relatively More Bank for the Buck When the SBA was established, its major financial program was to provide direct loans with interest rates considerably below market...

...In other words, SBA officials reasoned that they couldn’t get into trouble for loans they didn’t make...

...Nor is the SBA-like, say, the Farm Credit Administration-backed by a powerful lobby group...

...Unlike antitrust suits and other sweeping regulatory schemes, aid to individual small businessmen forces liberals to deal directly with a rather alien concept (the profit motive) and a rather unfamiliar breed of people...

...According to congressional investigator Curtis Prins, “What is happening is that there are groups going around the country, franchising black-owned minority firms...

...White Businessman-will be 49-percent owners...

...Credit terms have been tightened, so it is now generally mandatory to pay within 30 days...

...What has kept the SBA operating for the past 21 years has been pressure from Con‘gress, where reverance for small business is almost as strong as support for motherhood...

...Small businessmen are neither a very organized presence in Washington, nor especially fond of the Small Business Administration...

...The SBA-the only gov er nm e n t age n cy s pecifically designed to help the small businessman-is widely regarded as a bureaucratic joke...

...I had an economically deprived childhood...

...The phone calls just kept coming...

...If the allegations made during the House banking committee hearings are true, there is a third element to this SBA subsidy-“bank bail-outs...

...The whole performance seemed to have been lifted from an after-dinner speech to the Bakersfield, California, Rotary Club...

...It is easy to see why such an agency would have limited appeal to liberal thinkers during the 1950s’ when the economic vogue was John Kenneth Galbraith’s The Affluent Society and his argument that big (be it government or corpora ti on s ) was good for us all...

...Although a technical violation of SBA regulations, it is easy to see how such govern m ent-guaran teed refinancing could be arranged...

...I’m here to make a contribution to the small businessman if I can...

...In mid- 1972 the normal ‘operations of the agency came to a virtual halt as the SBA struggled to deal with the havoc caused by Hurricane Agnes...

...Any tightening of SBA loan procedures comes at a particularly inopportune time for the small businessman...

...While Agnes represents somewhat of an extreme, Arthur Armstrong, who runs the SBA’s loan programs, admits that “a big earthquake really slows things down., too...

...SBA is particularly proud that two-thirds of all federally chartered banks participate in the guaranteed loan program It is not hard to understand why...

...A 1973 General Accounting Office study found that more than half of the SBA’s minority loans were “in trouble...

...There are a few loopholes that do permit the deduction of this kind of a loss, but they are generally open to only the handful of small businesses with access to our leading tax attorneys...

...What’s in It for the Banks When asked about the dormancy of the direct loan program, SBA officials invariably talk about the importance of involving the private sector and the necessity for a small businessman to develop a working relationship with a local banker...

...While on a government salary of $32,000, Regan had purchased a 54-acre farm for $335,000 with a $300,000 loan guaranteed by his brother-in-law...

...Real Family Feeling ~ ~~ Accustomed to this kind of treatment, SBA was shocked when a subcommittee of the House Banking and Currency Committee began hearings last November on “reports of alleged criminal activity involving SBA officials, employees and borrowers...

...The hearings began by providing a detailed account of a number of suspicious loans made by the SBA’s Richmond office, which services most of the state of Virginia...

...The bank’s risk or exposure in lending the money is only $100...

...Warren got his job by answering an ad in The Wall Street Journal...

...During the first rocky years of any new enterprise, it is unlikely that there will be enough money coming in to pay off the principal-let alone the intereston a loan...

...It is easy to understand the appeal of the guaranteed loan program to the tight-fisted economists at OMB...

...Take the way the Treasury Deparment deposits millions of dollars, in noninterestbearing accounts to compensate our largest banks for providing the government with such minor services as cashing federal paychecks...

...Inflation and the shortage of raw materials confront small enterprises with what might best be called financial constipation...

...Then there is the guaranteed student loan program where the federal government in some cases has become the collection agent for bank loans to shady vocational schools...

...That is when an SBA-guaranteed loan is substituted for a conventional bank loan that is in danger of defaulting...

...B What has happened in thi last five years has been an astronomical growth of the SBA’s guaranteed loan program to its current level of almost $1.5 billion a year...

...The root of the dilemma is that the two major sources of business capital (banks and tee stock market) are virtually closed to new ventures...

...This, perhaps as much as anything, symbolizes the SBA’s position in the Washington pecking order...

...Louis Laun said candidly, “Right now it would be damned hard to get someone to put up $100,000 even if you had an idea as hot as Xerox...

...Obviously, any program of “compensatory capitalism” (a term coined by Howard Samuels when he was SBA administrator in the Johnson Administration) is fraught with difficulties...

...Instead of putting the capital that must stand behind their loans in lo wer-yielding Treasury notes, these federal banks can lend this money out through SBA guaranteed loans...

...They regarded them as competitors...

...When my attention began to wander, Warren focussed his entire presentation on the woman from the SBA’s press office who was accompanying me...

...Both Houses have select committees on small business which traditionally play a cheerleader role for the SBA...

...Bank lending is severely limited by their proverbial caution...

...Not only is the bank‘s exposure limited to just 10 per cent, but it is able to lend at 11.25-percent interest money that it otherwise couldn’t lend at all...

...Traditionally, when businessmen who are not plugged into the New York-Washington axis want a high government position as a frosting for their entry in Who’s Who, they hire a second-rate Washington fixer like Robert Winter-Berger to coordinate a letter and phone call campaign in their behalf...

...The SBA’s current neglect is a little harder to explain, since, with the populist revival of the last several years, economic competition is again in fashion...

...For while the captains of industry are often encountered these days on the East Coast foundation/ study commission circuit, small businessmen tend to be an unknown . quantity, seemingly isolated in the Peoria’s and the Mobile’s that constitute the real “other America...

...Even this figure is somewhat deceptive, since almost half of these direct loans went to minority enterprises...

...In return, Rep...

...Yet despite-or maybe because of-Warren’s lack of Washington sophistication, there was a sincerity, a sense of mission about him that is hard to find in government these days, this side of Leon Jaworski’s office...

...For the remaining nine years of the loan, the bank continues to collect this hefty rate of interest while facing absolutely no risk that the money will not be repaid...

...This requirement allows banks to serve as the principal referral agent for potential SBA borrowers...

...Within the first year, the least likely time for a loan to be defaulted, not only is this $100 repaid, but the bank also collects $1 11.25 in interest...

...In evaluating loan applications, the SBA leans heavily on the analysis provided by the bank which referred the loan...

...Even Louis Laun admits, “For the first several months after the hearings, there was an inevitable tendency by our loan people to play things awfully safe...

...But, as in so many other areas, well-intentioned efforts to eliminate corruption often have unfortunate side effects...

...It is vital to turn a bland dish of the economy into a wellseasoned palitable economy...

...In other words, they will go out and find a couple of blacks and say, ‘We want to put you in business.’ The big thing now is food processing on military installations...

...The idea that government should also work from the other end to foster new and existing small businesses is not even discussed...

...At crucial points in his monologue, Warren would lean across his desk and stare intently for three or four seconds to emphasize a point...

...To qualify they must either limit them selves to just ten investors or go the almost absurd route of trying to obtain equity capital without granting voting stock in return...

...At the outset of the prearranged interview, Warren, obviously new to dealings with the press, apologized for not having prepared remarks ready...

...In the same way that the introduction of some form of progressive business taxation might lessen the current trend toward bigness, a liberalization of this one aspect of our tax laws might help give US the venture capital we need...

...The hearings have continued this year with investigations of local operations in cities like Chicago, Milwaukee, and Atlanta...

...And in a third case there is fraud and we have to put a lock on the firm’s door to protect our investment...

...The SBA’s reputation as a bureaucratic backwater may be related to the historical curiosity that Walter Shapiro is an editor of The Washington Monthly...

...However, we will have some people on your board of directors who will do all your books for you, we will handle everything there is, and we will take a percentage of your profits, plus you have to pay us for all these services that we provide.’ ” Missing the Big Picture It is easy to see why these accusations of widespread corruption within the SBA appeal to congressional investigators and the press...

...SBA lending is limited to what Laun calls “the upper-middle class of the turned downs”-roughly the top five per cent of those who can’t get conventional financing...

...Located in a non-des crip t downtown Washington office building, the SBA itself radiates a look of, if not failure, at least defensiveness...

...Not only does the SBA have lower standards for minority loans (both in terms of collateral and prior business experience), but they also serve as a prime contractor on federal projects and then subcontract the work to minority businessmen...

...As a result, to get an SBA loan “someone has to first sell his proposition to his bank,” explained Arthur Armstrong, who runs the program...

...SBA is like the salt that seasons the whole meal...

...Unfortunately , the SBICs disperse only about $200 million annually and only a fraction of this is in the form of equity capital for new ventures...

...More Equity Funding Seeded Although clearly preferable to this guaranteed loan program, direct SBA loans should not be regarded as a panacea for the problems of the entrepreneur...

...Life in the Richmond office grew so nonbureaucratic that one of Regan’s chief assistants told Curtis Prins, the banking committee investigator, “I don’t know whether I will be killed or what...

...In IndianapoIis the relationship between the SBA and the local banks is so close that they arrange guaranteed loans over the telephone...

...A second can’t get the tower on a federal building completed before the deadline...

...Louis Laun, who at one time administered the program, acknowledged that it produced “one crisis after another...

...We will get this company together for you, you will be 5 1-percent owners, and me-Mr...

...Instead, he spoke from detailed notes scrawled on pieces of yellow legal paper spread out in front of him: “We’re dedicated to freeing the bird of small business and letting it fly...

...President Ford had this in mind when he cited “the continuing success of SBA’s loan guarantee program” to support his argument that a special appropriation of an additional $360 million for direct SBA loans would be “excessive” at a time “when both the Congress and the Administration are committed to fighting inflation by reducing federal spending...

...Even under these little-known statutes, small businesses face a host of restrictions...

...Although it is almost criminally easy for the wealthy to limit their taxable income in other areas, it is surprisingly difficult for an investor who takes a loss on a new venture to recover part of it on his taxes...

...But as an independent agency, the Small Business Administration is virtually without friends in the executive branch, grateful for what crumbs it is thrown by a relatively indifferent Office of Management and Budget (OMB...

...Yet when liberals talk of stimulating competition they are invariably referring to government regulation by the Justice Department’s Antitrust Division or the Federal Trade Commission...

...Frank Annunzio, in a remark that still rankles the SBA today, said, “Apparently people in the SBA all had a price...

...Guaranteed SBA loans are exempt from the reserve requirements (about 20 per cent of a bank‘s assets) imposed by the Federal Reserve...

...The lobby features a display entitled “SBA Highlights,” with slightly yellowed clippings from papers like the San Antonio Light heralding SBA activities...

...To understand the appeal of SBA guaranteed loans to banks, let’s examine a hypothetical situation where the SBA guarantees 90 per cent of a $1,000 loan at 11.25 per cent over 10 years...

...Even in the darkest days of the Nixon Administ r a t i o n , someone like Father McLaughlin was not recruited for the White House staff through an ad in Catholic Digest...

...Outside the SBA press office are stacks of unclaimed handouts from the preceding two months with catchy headlines like “SBA Announces Foreign Trade Workshop...

...How Not to Help Small Business by Walter Shapiro Senator William Proxmire expressed conventional liberal wisdom when he placed the Small Business Administration (SBA) high on the list of federal agencies that should be abolished...

...Although under private management, SBICs obtain the right to borrow money indirectly through the SBA in exchange for making a commitment to invest in and lend to small businesses...