The SBA Is Leaner but Not Meaner

If anything in American life could be added without much fuss to the near-holy trinity of Mom, the Flag and Apple Pie, it would be Small Business.

Defined as companies with fewer than 500 employees, small firms are invariably described as the backbone of our economy, the lifeblood of the nation’s commerce.

“America must reward the efforts and dreams of entrepreneurs,” President Bush said in his latest State of the Union message. “Small business is the path of advancement especially for women and minorities.”

Yet the government agency most directly responsible for aiding these enterprising folks -- the Small Business Administration -- stands to see its funding trimmed in the federal budget for fiscal 2006, which begins Oct. 1. If approved, it would mark the fourth year in a row that the SBA has endured a cut in its operations.

Not surprisingly, some are displeased.

Lawmakers are griping that the SBA, which supports access to credit for small companies by guaranteeing 50% to 85% of their bank loans, is scrapping subsidies that used to cover the cost of default insurance. The SBA is also under fire for gutting a micro-loan program geared toward women and minorities.

Beyond that, the agency is being hammered in some quarters for pushing smaller loans -- $50,000 and below -- rather than the $200,000 average that the SBA used to guarantee.

Yet, in stark contrast with the Washington pen pushers who reflexively ask for more money all the time, SBA Administrator Hector Barreto doesn’t bemoan all the belt-tightening. In fact, he’s quick to praise the parsimony.

“We do more with less,” Barreto told Congress in submitting his budget request for the next fiscal year.

The claim has outraged some on Capitol Hill.

“How do you do more with less?” asks an incredulous Rep. Nydia Velazquez of New York, ranking Democrat on the House Small Business Committee. She and the panel’s other Democratic members have issued a 30-page report criticizing cutbacks at the SBA and other agencies.

But in the real world, away from this inside-the-Beltway brouhaha, things look very different. Although it’s true that budgets to pay for SBA offices and personnel have declined, the agency’s authority to back loans to small companies actually rose -- from $9.5 billion in 2001 to $16 billion this year.

Last year, the agency guaranteed loans to 81,000 small companies, and this year applications are running 30% ahead of that.

As for the focus on smaller loan amounts, that’s not a reflection of tough times; it’s simply a nod to the needs of those in the trenches.

“Most small-business people I meet say, ‘I don’t need a million dollars. I need $20,000 or $10,000,’ ” explains Barreto, who ran his own small stock brokerage and financial planning firm in Glendale before heading to Washington in 2001.

Bank of America Corp., the largest lender to SBA-assisted borrowers in the U.S., embraced the small-is-beautiful approach more than a year ago. Today, the bank is “making 10 $50,000 loans where before we’d make one half-million-dollar loan,” says Rod Banks, an executive vice president for BofA.

A big reason for the change is that the SBA has ramped up its Express program, which guarantees 50% of the loan amount instead of the traditional 75% but, as an offset, greatly reduces the red tape involved.

Essentially, the SBA relies on the banks’ paperwork and software to establish an applicant’s creditworthiness, dispensing with government documents and long review periods.

“The banks like it because it saves money and time,” Barreto says, “and it saves us and the borrower money and time.”

Speed was crucial for Jose Maldonado, owner of the Taco King restaurant chain in Azusa. When he wanted to expand, he had to quickly come up with the financing to buy his equipment. “I needed refrigerators and stoves before I could start,” Maldonado says. He found just the right recipe for growth with a $40,000 SBA-backed loan from Wells Fargo & Co.

Meanwhile, easier access to capital allowed Julieta Garcia to expand her Latis Career College in Los Angeles from a travel agency that also taught others how to run a tourism business to a school in which 90 students are studying a wide range of subjects.

“My students kept asking if I could teach computers ... and then how to be a medical assistant and how to qualify for child-care work,” recalls Garcia, who 14 years ago received a $70,000 SBA loan from Bank of America to start the business and later took out a $150,000 loan to finance an expansion.

Now, she is using a new loan of $50,000 to help Latis qualify for federal accreditation so that she can increase financial aid for her students.

It wouldn’t be surprising if some of them, in turn, also drew on the SBA one day. Although the dismantling of the micro-loan program has generated a lot of political heat in Washington, the agency hasn’t forgotten about minority or female business owners, as some pols would have you believe.

It ditched the micro-loan program for one reason only: It was woefully inefficient. “With micro-loans we used to have $1 in costs for every $1 we lent out,” Barreto says.

Under a new system, the SBA is relying on 600 community banks and small-business lenders to reach out to these communities. The SBA guarantees 85% of the loan amounts.

“We do the loan quickly and don’t need government paperwork,” says Tim Jochner, chairman of Oakland-based Innovative Bank, which specializes in loans of $5,000 to $15,000. Innovative is experimenting with machines in Best Buy Co. and other stores that will take loan applications, process them and possibly even approve them -- all in an instant.

Finally, there’s the concern among some in Congress about the SBA’s cutting of default-insurance subsidies, which has forced borrowers to shoulder costs equal to 1% to 2% of their loan amounts.

But again, where some view this as a sign of trouble, Barreto sees progress. “We no longer have to ask Congress to renew subsidies every year,” he says. “This program is now financed by lenders and borrowers” operating in a marketplace.

The bottom line: It may be the season in Washington to cry about the state of the small-business lending. But most of that is just blather from politicians -- one group that has a hard time understanding that sometimes you really can do more with less.

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James Flanigan can be reached at jim.flanigan@latimes.com.