The Effectiveness of the Small Business Administration
Do SBA programs truly help struggling small businesses in America?
April 6, 2006
Chairman Tom Coburn, M.D. (R-OK) questioned whether the Small Business Administration is contributing to the growth and health of the nation’s small business community at his Subcommittee hearing where he heard testimony from the SBA and others to discuss the effectiveness of the agency’s programs to provide loans, federal contracts and regulatory assistance.
At the heart of the controversy surrounding the hearing was testimony presented by economist Dr. Veronique de Rugy, Research Fellow at the American Enterprise Institute. Dr. de Rugy’s findings on the effectiveness of SBA programs prompted her call for the abolition of the SBA, drawing the ire of SBA constituent groups.
The balanced panel included three witnesses who claim SBA is effective (including SBA Administrator Hector Barreto), three critics of the agency, and the non-partisan Government Accountability Office.
Some highlights from the Chairman's statement:
“There is a perception out there that to be for the SBA is to be for small business, and to be against the SBA is to be against small business,” Dr. Coburn said. “While the SBA is supposed to help small business, the interests of small business and the interests of SBA are only synonymous if and when the SBA is achieving its mission effectively and efficiently.
“If SBA is broken, it’s certainly not the small business sector that benefits from maintaining the status quo at the agency, but rather the bankers and big corporations who are currently profiting from SBA.”
“While a small fraction of businesses and private lending institutions profit reap the profits, these loans help the few at the expense of the many that don’t get them,” Dr. Coburn said. “The unfortunate result is that small businesses that do not have the benefit SBA assistance are left to compete on their own against those that do. Injustice is bound to occur when the government picks winners and losers in the marketplace.”
Throughout the hearing Dr. Coburn emphasized the importance of small business to the nation’s economy, citing what they need most is regulatory and tax relief. At the hearing, the Subcommittee heard testimony that small businesses pay $2,000 more per employee paying to comply with onerous government regulations than bigger businesses spend.
• The Small Business Administration (SBA) does little, if any, measuring of the impact its programs have upon the small business sector or the national economy. It primarily measures outputs such as number of loans made rather than outcomes such as the success of businesses helped, or the impact of the loans on the credit industry and small business sector growth.
• SBA Office of Advocacy estimates that compliance with federal regulations cost small businesses (which make up more than 90% of all businesses) over $2,000 more per employee per year to comply with Federal regulations than the national average, which is already $5,633 ($1 trillion annually).
• Nevertheless, SBA dedicates less than 2% of its budget toward efforts to reduce regulatory burden for small business. In addition, it has lowered its FY2007 goals below the amount of achieved savings in the two previous years.
• The SBA Inspector General reports that large companies may often be awarded small business contracts simply by working within the rules in place, demonstrating a need for change.
• SBA could not produce data supporting the rationale for its 7(a) loan program: that a market failure exists in the credit market.
• In fiscal year 2005, SBA guaranteed approximately 105,000 loans for the nation’s 24.7 million small businesses, which means that these loans reached less than 0.5% of all small businesses.
• There is no objective definition of “disadvantaged” or “minority” that would ensure that SBA helps those most in need of help. Instead, skin color or gender of business owners is equated with disadvantage – a premise that is insulting, discriminatory and factually inaccurate.
• The definition of what is a “small business” is difficult to understand and varies from industry to industry. For example, a company with 1,500 employees can be considered a small business, though it is bigger than 99% of all companies in the nation.
• SBA continues to fail its evaluation on financial performance under the OMB Program Rating Assessment Tool.
• SBA’s 7(a) loan program is a boon for the lending industry, which is a primary beneficiary of the program. Lender associations and banks boast about the high rates of profitability the program brings.
Impact on Taxpayers:
• In a recession, it is likely that the number of 7(a) defaulted loans would increase, and thus increase the chances that taxpayers would be forced to subsidize the cost of the loans.
• The federal government’s 23% quota for small business contracts has often led to awarding contracts based upon company size, rather than upon best value, meaning taxpayers overpay for goods and services purchased by the federal government.
• All businesses bear the burden of regulatory compliance, and small businesses with less than 20 people more than everyone else. A company of 19 people pays on average $145,293 complying with federal regulations.
These Findings Demand a Response:
• The Chairman is requesting that GAO examine the extent to which SBA measures the impact of its programs upon small business and the economy and whether that effect is positive or negative, the extent to which the private loan market provides adequate credit for small businesses, and the extent of financial risk American taxpayers are required to bear from SBA programs.
• SBA reauthorization (up for consideration this year) must:
o Require SBA to measure the outcomes and impact of its programs on the national economy
o Set measurable, time-framed goals for SBA Office of Advocacy relating to the relief of regulatory burden on small business, in addition to shifting more than 2% of its resources to regulatory relief.
o Issue a transparent and data-based definition of “disadvantaged” and “small” that will avoid the arbitrary, and discriminatory implementation of 7(a) loan program and 8(a) set-aside program.
