The 1971 California earthquake cracked the walls of Pietro Vitale's San Fernando pizza factory, and would also have tumbled the firm into bankruptcy, had it not been for a $400,000 loan from the Small Business Administration.
Three years later, the agency generously guaranteed a $388,000 loan to Vitale, and in 1981, when Oh Boy Corp. again teetered at the brink, the SBA came across with a $425,000 loan.
"The SBA has saved our skin again and again," says Vitale, an exuberant native of Naples, Italy, who was once the top-selling Good Humor man in Eagle Rock. "And now--now I'm a success."
Officials of the Reagan Administration might offer a different description for Oh Boy, which has lost money in three years since 1970 and which came close three other times. They would probably describe the company as an "economic straphanger"--a weak firm that has been able to survive and compete only by dint of an open-handed Small Business Administration.
Help Small Firms
The Administration's objections to such subsidies are a key reason that officials this year proposed to abolish the agency, an Eisenhower-era creation that was intended to stimulate business start-ups and help small firms better compete with large ones for credit.
The Administration's initiative has renewed debate on whether the SBA gives a deserved lift to would-be entrepreneurs, or whether it is simply the designated welfare agency for the nation's 14 million small businesses.
While it seems unlikely that the proposal will win congressional approval in 1985, many observers believe that the issue will continue to simmer in years ahead as the Reagan Administration continues efforts to pare the size of government.
Critics, including Budget Director David A. Stockman, maintain that there is no economic rationale for the SBA, since its loans go to only 2% of small businesses. Rather than bolstering a disadvantaged economic sector, they contend, the loans amount to gifts for a minority that is too weak to compete.
Critics also contend that the loan programs are wasteful and too easily abused, and that they have served as little more than a pork barrel for congressmen and senators who wish to dish out money to politically potent small business constituents. Legislators have used the agency in recent years to dispense loans to border-town retailers hurt by a devalued Mexican peso, tourist businesses hurt by gas-shortage scares, and even fertilizer salesmen hurt by federal regulations.
The Administration has proposed to do away with the agency's programs of direct loans, guaranteed loans and disaster loans, which last year distributed $3.4 billion to 21,500 businesses. It would transfer to the Commerce Department such remaining activities as its minority aid, small-business counseling and programs for setting aside a portion of government contracts for small businesses.
Stockman says abolition would cut the deficit by $1.5 billion a year if the agency's loan portfolio is sold. Beyond cash received for the loans, a sale would save on staff and other operating expenses.
Resisting the proposal are a coalition of the program's small-business beneficiaries, a host of congressional allies, and banks. The SBA's administrator, James C. Sanders, officially supports the Administration's proposal but has mounted a quiet rear-guard action to preserve its autonomy.
The Reagan Administration has already substantially reduced the size of the agency. Since 1980, the SBA payroll has fallen 20%, to 4,900 employees; in the last three years, direct loan volume has been cut 40%, and guaranteed loan volume 12%.
The agency's loan programs have been accused of both waste and abuse from the beginning.
John Luke, an associate director of the General Accounting Office, the watchdog agency, says the agency's 32-year record is "replete" with examples of bad SBA loans.
Too Eager to Lend
They arise, he says, partly because the agency's mission is to help fledgling firms that are less credit-worthy than those that could turn to banks to raise capital. But the agency also has been too eager to pump loans out the door, "and not enough concerned with getting creditors to pay them back," Luke adds. Such practices have pushed the SBA loan default rates to a peak of 23% in 1982.
Critics such as Stockman suggest that loan dollars flow most readily to "government-wise" applicants who are eager to take advantage of the SBA program's special attractions--among them, longer pay-back periods than are commercially available. While banks are reluctant to lend for more than three years, SBA loans average between seven and 10 years.
To be eligible for SBA money, applicants must demonstrate that their loan requests have been turned down by two banks. But those seeking SBA money say such rejections are easily obtained.
Los Angeles loan applicant, Patricia L. Ruiz of Robles Custom Furniture, says she could "easily" have gotten a bank loan in 1981 but found the prospect of a lower-interest, longer-term SBA loan "tempting." She went to two banks and asked for a $50,000 loan at 8.75% interest, at a time when the prime lending rate was about 20%. She told the bankers that if they could not meet those terms she would take a letter of refusal.
"I don't know if that was protocol," said Ruiz, who later received a $50,000 SBA loan at 8.75% interest.
Los Angeles attorney Diana L. Cole says she asked bankers for a $75,000, 10-year loan in 1978 when she wanted to set up her law practice, although she fully expected to be refused because of her inexperience and modest net worth.
She says the approach was suggested by a consultant whom she hired to prepare her SBA loan application, and who also suggested that Cole ask the banks and the SBA for more than she needed.
"You could go to any banker and set it up to be turned down," says Cole, who received a $68,000 SBA loan although she says she may have needed only $25,000.
She says she strongly favors the program and now regrets that "maybe I was too greedy. That money's like the church fund; you shouldn't borrow unless you really need it."
Cole asserts that since she made her payments on time SBA officials did not follow up to find out how she had spent the money. "I could have bought an apartment house; I could have lost it at the track," she says.
SBA officials contend that waste and abuse have diminished in the past two years under Administrator Sanders, as the agency has emphasized safe loans and stopped judging loan officers' performance on how many loans they passed out.
Charles Herzberg, head of the SBA's business loan program, says there is no hard data yet to substantiate the claim of lower loss rates, but there are "early signs" of improvement.
He maintains also that there is now less reason for loan seekers to make phony applications for bank loans, since interest rates on direct SBA loans have been raised so that in many instances they are nearly as high as bank rates. SBA direct loans, however, continue to offer more favorable pay-back periods.
Lack of Justification
At the heart of the Administration's SBA argument is its contention that the loan programs have no economic justification.
Stockman testified last month that the agency's resources are too small to help small business compete with big firms in any important way, or to finance the emergence of new industries. Only about 0.8% of the loans that went to high-technology industries between 1978 and 1982 were from the agency, he said.
But a large share of loans go to business sectors where competition is already fierce and start-ups frequent, such as the retail, wholesale and service sectors. Last year, they claimed 60% of the loan funds.
About $228 million in loans went last year to such independent professionals as doctors, lawyers, accountants and engineers, although their often-large incomes generally make them more credit-worthy and give them better access to commercial credit sources.
The loan program, Stockman argued, is also unfair to businesses that raise money on their own as it "sprays a faint mist of subsidized credit into the weakest and most prosaic nooks and crannies" of the economy.
Can Cause Hardship
Critics say also that the loans can actually cause hardship when they aid persons who may not be equipped to run a company.
One borrower who regrets his experience is Jerry Lucero, former general manager of a paint company. Lucero, 47, got an initial SBA-guaranteed loan of $40,000 in 1976 to set up his own paint store in Ventura.
From the beginning he was plagued by difficulties, including long delays in the opening of the store because of a slow remodeling contractor, he says. On the advice of the SBA, he borrowed another $50,000 to try to keep going. But Lucero defaulted, was locked out of his store by the landlord, and finally filed for bankruptcy in the fall of 1979.
Since then he has lost his personal credit and has not been able to find a suitable full-time job, he says.
"I wish I'd never done it, or at least started cutting my losses a lot earlier," says Lucero, who believes he might still prove himself with a second chance. "That money was too much of a temptation."
The agency's defenders say such cases are rare, and insist that the government has a role in helping persons who cannot get bank loans but have a reasonable chance of success. They say SBA loans and loan-guarantees have helped a number of well-known business successes, such as Federal Express Corp., and, in Southern California, Marie Callender Pies and C. M. Conroy & Co. florist shops.
Would Lose Influence
Some SBA partisans insist that small business would lose influence in the federal government if agency activities were transferred to the Commerce Deparment. "The SBA has been a good voice for small businesses," Administrator Sanders said in an interview.
Among such small-business lobbies as the National Federation of Independent Business, there is strong support for the agency's program of loan guarantees, which are extended to firms that are generally more credit-worthy than those receiving direct loans. Advocates note that more than 30% of bank loans extended for six years or more carry SBA guarantees.
One of the important advocates for SBA's survival are the 11,000 banks that have made SBA-backed loans. Such loans were made to nearly 17,000 businesses last year, and the SBA guarantees were valued at more than $2.4 billion.
Ninety percent of such loans are guaranteed, which confines the bank's risk to the remaining 10%. If the bank resells the guaranteed portion to investors in the "secondary market" for a 2% fee, its return on investment can be as high as 25%, Herzberg notes.
But perhaps the SBA's most powerful allies are on Capitol Hill, where legislators have used the agency's loan programs to help distressed constituents. Congress has directed the SBA to distribute loans to small businesses hurt by floods, hurricanes, and tornadoes, but also by any of a number of "nonphysical" disasters.
Last year, for example, Congress passed a bill sponsored by Rep. Douglas H. Bosco (D-Calif.) and Sen. Slade Gorton (R-Wash) that declared California and Washington a "nonphysical" disaster area, to make loans available to salmon fishermen hurt by the El Nino weather phenomenon that drove ocean temperatures up. Congress also directed the agency to declare 18 states nonphysical disaster areas so that cheap money could be made available to agricultural-supply dealers facing lower sales because of the "payment-in-kind" farm program that had the effect of removing land from production.
Such loans were made available to ski-lift operators hurt by a winter of scanty snowfall, and motel and marina operators in Northern California once when violence between Indian gill-netters and sport fishermen kept vacationers away.
Vulnerable to Abuse
The program was abolished in 1981, but resurrected last year, over Sanders' objection. "The agency is vulnerable to that kind of abuse," acknowledges Sanders. "It's a great place to drop all those giveaway programs."
Earlier this month, the Senate Budget Committee voted to cut the authorization of the direct-loan program by two-thirds, but to save the guarantee program and the rest of the agency. Rep. Parren J. Mitchell (D-Md.), chairman of the House Small Business Committee, has declared that he will fight to maintain the full direct-loan program, as he has in the past.
"Legislators are sent here to provide services for their constituents," explains Major L. Clark, staff director of the Mitchell committee. "That's exactly what these programs do."