SBA Sits on Sidelines as Small Businesses Suffer

During the Civil War battle at Antietam in 1862, Col. Benjamin Davis of the 8th New York Calvary led a raid on Confederate Gen. Longstreet's reserve ammunition supply train. Judging from its size, he realized the immensity of the Confederate effort and uttered nervously: "Where is McClellan and his army?"

The nation's economy is at a similar pivotal point, balancing precipitously on the edge of a potentially long and deep recession. While the government has moved rapidly to bail out Wall Street and large banks, many small businesses are asking a similar question: Where is the Small Business Administration?

The nation will only escape the economic downturn after it starts creating more jobs than it is losing. The best way to do that is to provide capital to help small businesses -- the single biggest generator of jobs -- continue operations and grow. So, you would think the government would be ramping up emergency SBA loan programs and taking other steps to accomplish that goal. But at the SBA, it's still pretty much business as usual, much to the frustration of Capitol Hill lawmakers and business leaders.

"The SBA is not the organization it used to be," said Margot Dorfman, chief executive of the U.S. Women's Chamber of Commerce, during a recent congressional hearing. "Eight years of budget cuts and poor executive leadership have gutted the organization. Many longtime, skilled employees and managers have left. Even now, we continue to hear that the SBA is not adequately supporting the businesses who are struggling Katrina disaster victims, and again who have been impacted by [hurricanes] Gustav and Ike."

Meanwhile, Main Street's frustration with the government's current effort is palpable and growing. "I am hearing every day from small business owners who are very frustrated as they watch while Secretary Paulson and President Bush repeat the failures of the past by always looking out for the corporate executives at the top instead of realizing that the whole fabric of our financial system is in peril," Dorfman continued. "Pouring billions of taxpayer dollars in at the top of the system in no way assures that a small business owner in a local community is going to be able to get their line of credit increased during this abrupt economic slowdown."

Dorfman is one of a growing number of small business leaders who are calling for "a big billion dollar punch" that will focus directly on the credit needs of small business owners. So far, however, just the opposite seems to be happening. Credit is growing increasingly tighter for small businesses, with little relief in sight.

More than 75 percent of the nation's banks said they had tightened their lending standards for loans to small businesses over the past three months, according to the most recent Senior Loan Officer Opinion Survey released by the Federal Reserve. That's roughly a 10 percent increase from its previous report.

More banks have tightened credit standards in the past year than at any other time in the past 20 years, Fed data shows. Even the most qualified borrowers are having trouble getting loans in the current climate of severe deleveraging and capital preservation, according to government officials, who issued a statement this week urging banks to lend money.

In a painfully ironic twist, the Federal Reserve's aggressive move to cut interest rates is actually punishing small community banks -- which are well capitalized and have little subprime mortgage exposure -- by reducing their margins. It's also causing them to lose money on SBA loans. As a result, many banks are cutting back their SBA lending staffs to save money.

Lending through the SBA's flagship 7(a) and 504 programs is down 55 percent and 36 percent, respectively, since this time last year. And since the major collapse of financial markets in September, SBA lending has declined by more than 50 percent, according to Sen. John Kerry, D-Mass., who chairs the Senate Small Business Committee.

"The Administration has done little to reverse this trend," Kerry says. "The rescue package was a good first step, but small firms can't wait months for help to reach them. Entrepreneurs need help now and they're clearly not getting it from private lenders."

For its part, the SBA blames the credit crunch and economic downturn. It says the lending contraction is due to three primary factors: reduced demand by small businesses, less creditworthy businesses, and tightening credit standards among lenders. About 75 percent of the decline in loan numbers this year can be attributed to cutbacks by just five major lenders, according to the agency.

No one doubts that the economy is playing a significant role in the decline. But many lenders counter that SBA programs are too costly and difficult for small business owners to access, according to Stephen Wilson, who testified recently on behalf of the American Bankers Association before the House Small Business Committee.

Kerry and other small business leaders have been urging the Bush administration to take action. At this point, however, the lame duck president has shown little inclination to come up with a program. But President-elect Barack Obama, who says economic stimulation will be the top priority of his incoming administration, should make the SBA a central focus of its recovery efforts.

The Women's Chamber of Commerce is urging Congress to take a number of emergency steps to bring the SBA into the game. They include increasing loan guarantees and limits; increasing lending authority; lowering borrower, lender, and oversight fees; easing rules on credit worthiness; loosening equity injection rules; easing rules for refinancing SBA loans, especially to refinance credit card debt; and allowing the SBA to restructure current SBA loans to lower payment terms.

Kerry wants the SBA to begin making emergency bridge loans through its disaster lending program, something the administration did following the September 11 terrorist attacks and the ensuing economic slowdown. The SBA can make those loans directly without a participating bank, and already has the authority to act, but so far has failed to do so. It's currently sitting on $6 billion earmarked for disaster loans that could speed the way to recovery.

These are extraordinary times that require extraordinary action. Keeping the SBA on the sidelines is a major failing of the current administration. Small businesses need bold and decisive action to help them create jobs, not just weather the downturn. And it needs to be done now. Nothing less than the economic recovery depends on it. So, where is the Small Business Administration?