Senate grills SBA

(FSB Online) -- The Small Business Administration took quite a beating on Capitol Hill today. A Senate oversight committee held a hearing on how the agency measures success. Meanwhile Senators John Kerry (D-Mass.) and Olympia Snowe (R-Maine) introduced a bill that would force the agency to improve its data collection.

While most banks keep track of what happens to the money they lend, the same isn't true of the Small Business Administration. The SBA tracks how many loans it guarantees in any given year under its 7(a) working capital program, but gathers little information about the performance of small businesses that have received these loans in the past.

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Because the SBA doesn't collect those numbers, there's way to tell whether the 7(a) loan program has been doing its job, the Government Accountability Office (GAO) said in a July report.

That report prompted senators Kerry and Snowe, who both sit on the Small Business Committee, to draft a bill that would require the SBA to track the performance of companies that receive agency loans, disclose lender portfolios, hold down lender fees, and calculate a default rate that can be meaningfully compared to commercial lending rates. Right now the SBA estimates that its 7(a) loan default rate is 6.96% over the 25 year life of the loans. That's difficult to compare with the default rate for commercial loans from FDIC-insured banks, currently 1.5 % a year.

"We want to get them back to reality," said Senator Tom Coburn (R-Okla.), who chairs the Subcommittee on Federal Financial Management, Government Information and International Security, in an interview with FSB.

At the hearing Coburn pressed SBA official Grady Hedgespeth, director of financial assistance in the agency's Office of Capital Access, to come up with better metrics. "The consequences will be in the next appropriations bill if we don't get there," Coburn told Hedgespeth.

Sen. Coburn wants the SBA to keep track of what happens to businesses that get 7(a) loans, how many jobs those loans create, and whether those businesses really couldn't get loans elsewhere. "You can't manage what you can't measure," he told FSB before the hearing.

The SBA doesn't even know whether or not its past loan recipients are still in business. In a recent interview, an SBA official pointed to Blue Pearl Yoga Studio as a 7(a) success story. When FSB tried to contact Blue Pearl, we learned that the Lake Forest, Calif. company had shut its doors less than one year after receiving an SBA loan.

SBA officials agree with some of the GAO's findings. "How well businesses do, that ultimately is probably the bottom line," said Charles Thomas, director of the SBA's Office of Program Development. But Thomas argued that the SBA lacks the resources to undertake more detailed performance tracking.

The SBA doesn't lend money directly under the 7(a) program. Instead it provides loan guarantees to commercial banks with the goal of encouraging them to make more small business loans, which are considered relatively risky bets. Some skeptics have called for getting rid of the SBA, arguing that its loan programs primarily benefit banks, not entrepreneurs.

"Small businesses don't need SBA lending," argues Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University in Washington, D.C., who testified at today's hearing. "They are doing great and already have access to credit."

The SBA responds that it serves a vital function by backing loans to minority and women-owned businesses that have difficulty obtaining conventional bank financing. In the fiscal year 2007 the agency guaranteed 99,607 7(a) loans totaling $14.29 billion, according to the July GAO report, about 36% of which went to minority borrowers and others in underserved communities.

By contrast, minority-owned businesses received only 9% of all conventional small business loans between 2001 and 2004, according to the GAO. "It's taken a lot of effort to get banks comfortable with the idea of lending to these businesses," Hedgespeth said at the hearing.

Agency officials also argue that those guarantees cost taxpayers nothing since lender fees take care of overhead. De Rugy retorts that taxpayers will be liable if the economy takes a downturn, driving more 7(a) borrowers into default.

In 2003 the SBA engaged the Urban Institute, a non-partisan research group based in Washington, D.C., to measure the effectiveness of the 7(a) loan program. The institute only just released its report, adding to the perception that the SBA has been dragging its feet.

The report itself adds little to the debate. It confirms that 7(a) loans tend to be larger than conventional small business loans and are more likely to go to minority and women owned businesses. But it makes no attenpt to measure the economic performance of 7(a) loan recipients.

Better SBA reporting would allow friends and foes of the SBA to understand the agency's true economic impact, argues William Shear, director of the GAO's office of Financial Markets and Community Investment.

"Reasonable minds will differ in their definitions of success," said Shear, who wrote the July GAO report. "But you have to have transparency."