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Swimming With Sharks

Author: Charles W. Thurston
October, 2011 Issue

Small business advocates worry about the possible effects of Senate Bill 1166.


The U.S. Small Business Administration (SBA) may be merged into the U.S. Commerce Department under legislation introduced earlier this year in the Senate, with a stated goal of greater federal agency efficiency. But such a move, say small business advocates in Northern California, could harm the unique mandate and existing efficiency of the SBA. Should that be the case, small businesses that depend on SBA loans and guarantees might be forced to search farther afield for available credit, slowing down the much-needed job creation process for which small business is best known.

Senate Bill 1166, the Department of Commerce and Workforce Consolidation Act, was submitted on May 26 by sponsoring Senator Richard Burr (R-N.C.). Apart from merging the two, the act also would move the National Oceanic and Atmospheric Association (NOAA) to the Department of the Interior, and eliminate a host of other federal programs, including grants for public telecommunications facilities and the Malcolm Baldrige National Quality Award, among others. “The amount of money wasted annually on duplicative programs within the federal government is staggering,” Senator Burr said at the time he introduced the bill.

The bill, which was co-sponsored by seven other senators, would seek to implement President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform’s recommendation to merge SBA and Commerce. Thus far, the bill has been read twice and referred to the Committee on Homeland Security and Governmental Affairs. Now that the deficit crisis dam has been plugged by a legislative finger, S1166 and other efforts to cut costs in federal government may move to the forefront of congressional focus.

Opinions differ on SBA impact

For some small business advocates, the merger might yield positive results on the whole, given the potential for greater efficiency. “It’s not like closing a welfare office with thousands of clients; there’s no SBA office in the North Bay,” says Ben Stone, director of the Sonoma County Economic Development Board (SCEDB) in Santa Rosa. “This may simply be part of the trend for government consolidation for greater efficiencies.

“We [the SCEDB] are not dependent on the SBA at all,” he adds.

For others, the benefits of the merger are a bit of a mystery.

“We don't think it would be a positive development, since SBA has a unique role to play, focused on small business, and that could get completely lost within Commerce, which has a larger agenda,” says John Arensmeyer, CEO of Sausalito’s Small Business Majority.

Still others see the acquisition of SBA by Commerce as an effort to choke back SBA activities: “You can’t lobby for autoworkers and for General Motors at same time,” says Lloyd Chapman, the outspoken founder of the American Small Business League, based in Petaluma. The ASBL has a stated goal of “stopping the diversion of federal small business contracts to large corporations,” which, Chapman points out, is a shared concern of President Obama.

A press secretary at Senator Burr’s Washington, D.C., office didn’t respond to queries regarding any anticipated benefits to SBA that might arise as a result of the merger.

Small agency versus large department

Part of the concern for the absorption of SBA into Commerce is the relative size of the two organizations, and another part is the basic mandate of each. SBA’s budget proposal for 2012 is up 19 percent to $985 million for programs and purposes including “Business Loan Subsidy ($215 million) and Disaster Assistance program ($167 million), ” according to the agency’s 2012 Congressional Budget Justification report. The Commerce Department, in contrast, has an $8.8 billion budget request, which was pared by some $242 million from the 2011 budget and is spread over nearly a dozen different agencies or units.

Mandate is, perhaps, an area of greater concern. The SBA is the only federal agency focused exclusively on small business and is perceived to be critical to the health of the nation’s small businesses at large. The agency describes its mandate in the following way: “The Office of Advocacy of the U.S. Small Business Administration [SBA] is an independent voice for small business within the federal government. Appointed by the President and confirmed by the U.S. Senate, the Chief Counsel for Advocacy directs the office. The Chief Counsel advances the views, concerns and interests of small business before Congress, the White House, federal agencies, federal courts and state policy makers. Economic research, policy analyses and small business outreach help identify issues of concern. Regional advocates and an office in Washington, D.C., support the Chief Counsel’s efforts.”

The Commerce mission is more complex: “The Department of Commerce’s mission is to promote job creation, economic growth, sustainable development, and improved living standards for all Americans by working in partnership with businesses, universities, communities and workers to: 1) Build for the future and promote U. S. competitiveness in the global marketplace by strengthening and safeguarding the Nation’s economic infrastructure; 2) Keep America competitive with cutting-edge science and technology and an unrivaled information base; and 3) Provide effective management and stewardship of our nation’s resources and assets to ensure sustainable economic opportunities. Commerce’s business and industry-related programs can help realize the priority goals of the President in the areas of trade, technology, telecommunications networks and infrastructure, environmental infrastructure, economic development and minority business,” according to the department’s 2012 Congressional Budget Justification report.

Education and counseling

While loans and loan guarantees may be the most recognized form of small business support provided by the SBA, counseling and training are major functions of the agency and its private sector partners.

Perhaps SBA’s oldest partner in small business education and counseling is SCORE, the national organization of retired executive volunteers who help small businesses. “Our San Francisco chapter SCORE office is actually located within the offices of the SBA, and our national budget is a line-item in the SBA budget that Congress approves,” says Lori Trippel, the San Jose-based district director for five chapters of SCORE in the Bay Area. “Our relationship with the SBA may be closer and may have existed longer than those of other organizations affiliated with SBA,” she notes.

While the San Francisco chapter also serves Marin and San Mateo counties, the North Bay chapter, based in Santa Rosa, serves the North Coast area (see “Be Advised,” Jan. 2009). Similarly, the San Jose chapter serves Silicon Valley, the Oakland chapter serves the East Bay, and the Santa Cruz chapter serves that county.

Although primary SCORE funding is virtually embedded in the SBA budget, the agency isn’t the greatest source of funding for the San Francisco district. “We gain some funding from donors, and from fees paid for some seminars and workshops, but counseling is always free,” says Trippel. “We counsel anyone who comes to us for assistance, no matter what their business needs are,” she explains. While most SCORE counselors are retirees, some are still employed but find the time to donate counseling hours. “The only paid employees in SCORE are through the national office in Washington,” she clarifies.

“One of the things we’re perhaps not as well known for is assisting companies already in business. In addition to startups, we have an active counseling program for helping businesses grow,” Trippel notes.

NGOs bolster SBA ranks in the field

Nationwide, SBA’s largest contracted technical assistance providers are the Small Business Development Centers (SBDC), which are typically hosted by nonprofit institutions of higher education and, in some cases, local governmental institutions. “Statewide, we served just over 50,000 small businesses in California last year, and there are a lot of jobs created and retained that are tied to those businesses,” says Ann Johnson-Stromberg, the Arcata-based communications and marketing manager for the Northern California SBDC Regional Network—comprising 14 counties from the Oregon Coast down to Monterey.

“SBA provided the California SBDC with $12 million in core funding in 2010, for which we were required to find matching funds; but we also have other sources of funding, including state money, grants and other donors; the SBA financing is our largest single source of income and therefore central to our budget,” Johnson-Stromberg says. “Some of the services we provide are one-on-one business advising for small businesses on a range of topics from startup basics to financing, procurement, regulatory compliance, bookkeeping, technology assistance, marketing and international trade,” she says.

While the SBDC is a national organization, California is among the largest of the state networks. The organization operates in a hub-and-spoke arrangement, with six lead centers, 35 service centers and more than 100 satellite offices throughout the state. In Northern California, there are 10 SBDC centers, “so this is a big area we serve,” says Johnson-Stromberg. Texas is the only other state in which SBDC has more than one lead center.

Small businesses don’t pay for any business advising at SBDC, although there may be nominal fees for some special seminars to cover costs, Johnson-Stromberg says. While the SBDC may plan and carry out events like seminars, SBA representatives also frequently participate as experts in presentations at the seminars, addressing issues like the latest trends in financing programs. The SBA also provides programming oversight and the SBA district offices coordinate resource partners like Women's Business Centers, the SBDC and SCORE. "In that regard, it’s a powerful catalyst to business activity within a community," Johnson-Stromberg says.

Some businesses come to SBDC for basics and others come for later stage specifics, but all are served, she says. “There’s no formula for how much a company needs; clients run the range from tire-kickers to established businesses with several years into their operations and a need for some gap financing or new equipment financing,” she says.

One powerful channel of counseling that SBDC uses is YouTube, which offers a variety of testimonial stories by Northern California small business owners. “Small businesses listen to other small businesses, and one of the things we’ve found is that some of these businesses tell our story better than we can,” Johnson-Stromberg says. One success story is Tamales Chepo’s of Elmira (near Vacaville), which runs in English and in Spanish, chronicling the tale of the company’s struggle to expand and survive, with a happy outcome that included an SBA loan.

Loans and loan guarantees

The meat of SBA’s small business support comes in the form of loans and loan guarantees, including those for growing a business as well as those for disaster relief. Perhaps the best known are the 7A program for businesses with “special requirements,” like exporting or operating in a rural area, and the 504 program for funding business owner-occupied real estate remodeling or purchase.

Most SBA loans are originated by qualified banks or other financial institutions, and guarantees include loans from the banks or institutions, which mitigate their lending risks through the guarantees. During the recession, many banks ceased to participate in the SBA lending programs, because demand was down and other bank business segment risks were up, bankers say. But over the past few months, hundreds of banks nationwide have come into or are back into the SBA lending program.

One North Bay financial institution that lends through the SBA is Redwood Credit Union, which began offering SBA loans in late 2008. “Since 2009, we’ve originated more than $56 million in 7A and 504 loans and, along the way, have grown jobs in the communities we serve,” says Michael Downey, senior vice president of business services at RCU, based in Santa Rosa. “These loans represent approximately 50 percent of our total loan originations during that time, so SBA loans are very important to our business,” he says.

Since RCU is a not-for-profit, member-owned cooperative serving anyone living or working in the North Bay and San Francisco, “We really focus on what we view as an underserved component of the small business demography in the markets we’re in: we focus on truly small businesses, or companies with revenues not exceeding $5 million, and generally with revenues of less than $2 million,” Downey says. “This segment of the small business community has historically had difficulty finding financing,” he points out. “With respect to SBA lending, our 7A loans average around $450,000, and our 504 loans average around $1.5 million,” he says.

As a regional lender, RCU does much of its business in Sonoma, Marin and Napa counties, but also serves San Francisco, Contra Costa, Lake, Mendocino and Solano counties.

Business developers as major SBA lenders

Apart from banks and financial institutions that lend through the SBA, there are a host of business development companies, like Walnut Creek’s Bay Area Development Co.

“Looking at our activity in Marin, Napa and Sonoma counties, we’ve done direct lending of $224 million since inception 30 years ago. And because the 504 program co-funds with bank loans, our share of the final lending package is only about 35 to 40 percent of a total project volume of $640 million,” says Jim Baird, chief executive officer. “These loans have gone to about 400 companies in the North Bay and helped create 3,600 jobs.”

Baird is one small business advocate who finds SBA’s work already very efficient. “The Small Business Administration, as federal agencies go, is a very small agency and, as a result, its efforts are substantially focused,” says Baird. “Nationally, the SBA 504 program does about $4 billion worth of direct guarantees per year, which are leveraged into well over $10 billion worth of project loans, without costing the taxpayers a cent.

“It may take us a month to work with a company to get ready to apply for an SBA loan, but once we’ve completed our work and the work of the correspondent lending bank is done, SBA only takes about three or four days to decide on an application. That’s pretty efficient,” Baird says.

“One of the reasons SBA can operate efficiently is that it’s small and doesn’t get a lot of [Congressional] appropriations, so it has to do more with less. That would argue for keeping SBA independent rather than wrapping it into Commerce,” Baird says. “I’d have concern about asking Commerce to advocate for small business. It would be like asking Home Depot to advocate for neighborhood hardware stores,” he concludes.



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