SBA Prepares for Leaner Times
The backbone of Orange County companies--small businesses that often rely on federally backed loans--would get a big jolt under President Clinton’s proposal to reduce the overall cost of government by slashing spending $13.1 billion and eliminating nearly 5,000 jobs.
One of the biggest cuts--$1.2 billion over the next five years--would come at the expense of the Small Business Administration, which guarantees repayment for 50% to 90% of any commercial loan that banks make to small companies.
The agency’s guarantee reduces the risks that banks take in making loans to small, often unproven companies. SBA-backed loans are given only to those companies that cannot secure conventional bank financing.
The President’s cuts, unveiled last week, would reduce SBA personnel, close down some of its offices and force borrowers to pay higher interest rates on the loans. In addition, banks making SBA loans would face somewhat higher losses for loans that go into default. They also would pay higher fees for participation in SBA lending programs.
Steve Waddell has seen SBA lending grow in Orange, Riverside and San Bernardino counties since he took over as director of the agency’s district office in Santa Ana. He remains confident that the agency will continue to foster the growth and development of the area’s 118,000 small businesses, despite the probable reductions.
Waddell talked about the proposed changes and the likely effect they will have on the ability of the SBA to fund small business development in Southern California.
Question: How much detail is known about President Clinton’s plan to trim the budget of the SBA?
Answer: Last Monday, the administrator of our agency hosted a teleconference, and at that conference he explained that the focus of these plans is to get the agency to serve more people at less cost. But we don’t know much of the details.
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Q: Is it possible to expand SBA lending at the same time the agency’s budget is being reduced?
A: The (Clinton) Administration plans to reduce the cost of the loan program by charging the borrowers and banks for the use of the program and to reduce the percentage of the loan we will guarantee. A lot of the specifics have yet to be ironed out because some of the changes require congressional approval. We don’t know when the new changes will become effective. Also, they did not announce how these rate changes are going to be implemented, how much of a reduction there will be in the amount of the loans we guarantee or how much more we are going to be charging the borrowers.
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Q: How do you think the proposal will be received by SBA lenders?
A: I have talked to several lenders and, though they are not elated, I think they are generally positive about the changes.
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Q: Even though lenders will be charged more to be part of the program and will have more exposure in the event of a default?
A: The objective of the plan is to make more money available to borrowers (by reducing the SBA guarantee, thus allowing the agency to cover more loans). During the last several years, we have run out of funds to cover loans and had to wait until Congress released additional funds. There is no authority to make loans when we run out of funds like that. With this new plan, the lenders can be confident there will be money there and they are happy about that. It is also good for borrowers. In the past, small businesses got loans approved but could not get the money. In the meantime, they may already have made plans to use that money. Those delays can be very costly for them.
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Q: What does the President’s plan mean to you?
A: I think it affirms the President’s commitment to small business and to the SBA. They are going to downsize us significantly, but we will continue to be a dependable work force. I think a lot of our employees are nervous, but we know the Administration is doing everything possible to provide for the employees.
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Q: Will the staff of every office be downsized?
A: Very small two- or three-person offices--called “posts of duty”--and some branches would be closed under the new plan. In this region of the country, there are some in places like Tucson, Reno and Ventura that will shut down. But there are not offices that small in Southern California, except for Ventura.
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Q: Do you know yet if the Santa Ana office will be affected by downsizing at all?
A: No, and we won’t know until the end of April. What we do know is that each state will have at least one district office. States like California with large numbers of small businesses will have more district offices. Right now California has six district offices and we don’t know yet how many we will have under the new plan. The Administration plans to announce before the end of April which will be closed. But there should not be any cuts in the delivery of service.
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Q: How does the agency propose to serve people in those areas once the offices are closed?
A: Our plan is to continue to serve those communities through our affiliations with small business development centers, certified development companies and the Service Corps of Retired Executives. Those groups can help small businesses apply for loans and provide consulting services.
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Q: Which programs have been most successful in Southern California?
A: We have had tremendous success with the standard core loan programs, called 7a loans, for financing small businesses. That funding has grown dramatically in this region over the last eight years. In 1988 we made $50 million worth of these loans and by 1994 that figure grew to $190 million. I think small business has grown dramatically from it. Our fixed asset loan program--used for construction and purchase of facilities--has also grown a lot.
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Q: Do you have an example of a successful local company that has been started or has grown as a result of SBA loans?
A: Richard Gregory, who owns a company called Certified Transportation Services, used an SBA loan to buy new facilities in Santa Ana. The company is a private bus service and when he moved he could store the buses on the property. He was also able to increase his staff from 12 to 20 employees after the move.
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Q: Will any programs be phased out entirely? If so, what would be the impact?
A: The deputy administrator said if we cannot effect zero subsidy rate (eliminate the use of taxpayer dollars to cover SBA loan losses), we may have to eliminate some categories of small businesses from applying for assistance or we will have to cut certain programs. But this is what we are trying to avoid doing.
