What Do You Think? Should the SBA be Abolished?

  • September 9th, 2013
  • Ty Kiisel

Screen Shot 2013-09-09 at 8.26.31 AMThis post was originally published last week on the Deseret News. My opinion is obvious from the start, but it is neither Entrepreneur’s editorial director Ray Hennessey’s opinion, nor many of those who have shared their opinions online and offline with me. What do you think?

In response to recent arguments that the SBA should be abolished, Charles H. Green of the small business finance newsletter Coleman Report answered, “Of course not, silly goose.”

There was some pretty inflammatory rhetoric Ray Hennessey published this week on Entrepreneur.com. He suggests, “It’s high time to eliminate the SBA altogether.”

I agree with some of the assertions he makes (there are problems at the SBA); I don’t agree with his conclusions. “The SBA’s loan programs are designed to fund businesses that can’t find funding elsewhere,” he writes, while suggesting private equity and venture firms raise billions of dollars to fund the good ideas.

I’m not sure what Mr. Hennessey is smoking, but only a very small percentage of small businesses in the U.S. are likely to have a scalable enough model to gain the interest of a private investor or venture firm. It seems naïve to suggest that a new dry cleaner or hardware store would have any luck at convincing a venture firm to invest in their Main Street business. Equity investors are looking for companies that can scale quickly and return large profits with the influx of some extra cash.

The SBA, banks and other small business-focused lenders fill an important financing niche to the very businesses you and I consider small businesses.

Is he suggesting that any business that isn’t interesting to a private equity investor or venture firm is a bad business?

In fairness to Mr. Hennessey, he’s spent his career writing about Wall Street and the IPOs (initial public offerings) of the sexiest of the sexy startups. His resume doesn’t say much about spending time working in the Main Street businesses that provide 70 percent of the jobs in our country and are those the equity markets aren’t really interested in.

Green calls Mr. Hennessey an “ideological bully.” I tend to agree.

Mr. Hennessey does point out that lumping sexy tech startups, Main Street businesses and larger small businesses into the same category just doesn’t make sense. Nevertheless, labeling the company that presses my shirts as unworthy of credit because a venture firm is likely uninterested in funding their company is kind of shortsighted — can we even say ridiculous? Remember, 70 percent of jobs in the U.S. are in the very businesses Mr. Hennessey seems to disdain.

The SBA does have some problems, but guaranteeing (it’s local banks that really do the lending) too much capital to Main Street doesn’t happen to be one of them. The smallest small businesses are still struggling for capital as banks remain anxious about lending to them. Does that imply they are bad companies or their ideas are bad ideas? Heavens no. It does suggest that the way we approach lending to Main Street needs to be re-evaluated to better serve that segment of the small business borrower market.

Mr. Hennessey suggests the SBA has a horrible track record and funds risky ventures. He must have missed Deborah Gage’s piece in the Wall Street Journal a little less than a year ago. “[T]here is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites,” she says. “About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.”

Although venture capitalists like to laud their success rates, “The National Venture Capital Association estimates that 25 percent to 30 percent of venture-backed businesses fail,” she writes.

What’s more, the likelihood the average small business would be interesting to an equity investor is only around 2 percent. They just don’t have the potential to scale big enough to make investors the rate of return they need to tie up their money.

If there’s a problem with small business lending, it’s the definition of what we call small businesses. Unlike Mr. Hennessey, I’ve spent my entire career working in small business. I’ve worked in a Main Street business with fewer than five employees, along with a software company with almost $30 million in revenues and more than 250 employees, and the venture-backed startup I work at now. They are all categorized as “small businesses” but have very different capitalization needs.

I’m not sure I understand how Mr. Hennessey can suggest that banks aren’t facing risks and are making bad decisions with money backed by the SBA when the success rate of venture capitalists and other equity investors isn’t much to sing and dance about. Some startups fail. There’s not much we can do about that, regardless of how much research we’ve done into their potential viability. I’m not convinced it’s irresponsible bankers foisting bad loans onto the SBA. I think it’s just a part of the same small business environment that causes 35 percent of venture-backed businesses to fail, too.

Where Mr. Hennessey completely loses me is when he suggests, “It’s not as important as you think.” He argues, “In short, large businesses, in industries that matter most, get only a negligible amount of funding from SBA-backed loans. That means shutting down the program would have a negligible effect on lending. Why keep a government agency in place if most of the market wouldn’t notice it is gone?”

Wow.

Main Street is what keeps communities alive, where most (70 percent) of U.S. jobs exist, and where two out of every three new jobs is created. I think that’s every bit as important as I think it is.

If anything, I think the SBA should be encouraging the banks within its system to step up and make more loans to small business owners by streamlining the process for loans of less than $50,000, for starters. Big businesses in major industries don’t need the SBA, that’s true. It’s the businesses you and I rely on to fix our cars, provide child care to our children and do my dry cleaning.

Mr. Hennessey suggests, “Perhaps there was a time when the SBA served a purpose for business. With abundant capital, better private-sector options and more worthy budget priorities for the government, now is no longer that time.”

I couldn’t disagree more with Mr. Hennessey’s assertions that we should abolish the SBA. And, with an audience that likely has an SBA loan or two, I can’t help but wonder if his audience feels the same way.

IMG_3366Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business best practices, tips and advice accessible by weaving personal experiences, historical references and other anecdotes into relevant discussions about leading people, managing a business and what it takes to be successful. Ty writes about small business financing and other best practices for Lendio, in addition to sharing his passion for small business every week on Forbes.com.

Author: Ty Kiisel | Google+

About the Author

  • Ty Kiisel

Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

Comments

  1. I am dumfounded that anyone who purports themselves to be informed about small business finance programs would advocate the abolition of SBA.

    Isn’t it time that some of these pundits actually go out and talk to small businesses who are struggling to obtain working capital, or loans that allow them to leverage their assets to acquire buildings.

    It is not practical or realistic to put most small businesses in a cookie cutter matrix or to be evaluated in a one size fits all model. Businesses need to be evaluated on the basis of their management, marketplace, product or service, the local economy, and a myriad of other factors. Subsequently organizations such as SBA have created multiple programs to deal with different market segments.

    Does anyone really think that all of the programs offered by SBA are ineffective or could be replaced by the private sector? The reason the SBA exists is that the private sector did not and has not provided the necessary capital for small businesses because of their risk. SBA insures that risk by setting prudent underwriting standards and realistic evaluations of market conditions in each small business loan. They have historically low default rates for the thousands of businesses they have served.

    I have spent an entire career working with businesses through Chambers of Commerce, lending institutions, and the SBA.

    The work the SBA does to coordinate all of the various programs for different market segments is amazing and thankless. Congress doesn’t understand what they do. Most financial analysts don’t seem to understand what they do.

    Access to capital is not just a marketing term. It is a real world problem faced by businesses every day, and the SBA is their lead advocate.

    Organizations such as mine, who finance small businesses with loans for the acquisition of buildings could not function without the assistance and guidance of SBA.

    I strongly believe we should stop taking for granted that the knowledge base for organizations such as SBA can be evaluated by sound bites of government inefficiencies. SBA has spent decades creating feedback systems with the local businesses in the United States so that they can have programs that really work.

    There is waste and inefficiency in every business and government organization in the United States. The
    needs of small businesses cannot be addressed by just letting the private sector marketplace take care of them. The SBA is capable of doing a better job at this and so are the banks and private equity funds, but it takes all of them to keep the U.S. small business system moving forward.

    One of the things that I have learned through the years is that the U.S. incubates small businesses better than any country in the world, and that is why we continually create new products and services that add to our GDP.

    The SBA plays no small part in that process.