Lending a Small Hand

A revived Small Business Administration is good news for local government.
May 2010
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

It's never been harder to start a small business or keep it going. Even if they're profitable, small businesses-no matter what business they're in-often operate on a thin profit margin. More importantly, they're usually undercapitalized, meaning they're vulnerable when credit markets dry up.

Yet small businesses generally drive job growth. Despite the attention economic developers pay to big plants and other large projects, most new jobs are created by small businesses-companies that employ 50, 25, 15 or even five people. They're easy for policymakers to overlook precisely because they fly under the radar. To understand how they contribute to your state or local economy, you need to comprehend not just one business, but an entire business-to-business ecosystem with many different markets, vendors, suppliers and customers.

It can be difficult, of course, for any local or regional economic development entity to compose a consistent package of policies and assistance for small firms-a package that helps small business owners understand how to run their business and provide them with financing, while still promoting the region's targeted economic development goals.

Most policymakers use a couple of basic tools. One is providing the funding for small business loans out of Community Development Block Grant money or other funds-even general fund money. The other is determining how to leverage the efforts of the Small Business Administration (SBA), the federal agency that provides technical assistance and loan guarantees to small business owners.

The SBA has been the subject of criticism for decades. It's regarded by conservative critics as an expensive and complicated way to funnel capital to small businesses-requiring large amounts of paperwork and tracking for relatively small amounts of working capital for most businesses. (It also defines small businesses as those with up to $20 million in revenue, which is a lot bigger than most are.)

In the waning days of the George W. Bush administration-which coincided, of course, with the financial meltdown in the fall of 2008-the SBA came under especially intense criticism for not pushing aggressively to counter the meltdown. At a time when business lending came to a halt, so did SBA-backed lending. This was partly because banks didn't really want to lend to anybody-even businesses with SBA backing. And it was partly because collateral traditionally used for small business loans, such as home equity, was dropping in value. But it was also because the SBA wasn't pushing very hard.

Under the Barack Obama administration, the SBA has been revived. Most bankers and business leaders have praised Obama's pick of Maine venture capitalist Karen Mills as SBA administrator. In turn, Mills and other administration leaders, including U.S. Commerce Secretary Gary Locke, have pushed the idea that federal programs, including the SBA, must focus on small businesses that foster innovation in the economy.

But maybe the most important component of the SBA's effort-the one local government in particular can use most effectively-is not the loan guarantees, but rather its widespread network of technical assistance. "Many creditworthy businesses are not ready to have conversations with the banks," says Jess Knox, an associate administrator for the SBA Office of Field Operations. Translation: Even if you could qualify for a bank loan as a small business owner, you may not know how to design a business plan or sell your business to a bank's lending officer. You're too busy running your company to learn how to finance it. In particular, the SBA-funded Small Business Development Centers located around the country are among the best resources to help small business owners overcome this problem and get up to speed. (Full disclosure: I'm a former Small Business Development Center client.)

The local government-SBA link begins with funding. Many cities provide capital funding for small business; sometimes it comes from Community Development Block Grants, sometimes from other sources. Usually the amounts are not very big-no more than $50,000; often more like $15,000 to $20,000. They often contract with the Small Business Development Centers to make these loans. This allows cities to combine their money with the SBA technical assistance in making local businesses more viable.

Remarkably even as economic development policymakers promote resources such as the SBA's loan guarantees and technical assistance, they usually don't use them strategically to pursue their own economic development goals. All too often, the economic development dealmakers are out hustling large deals, while lower-level staff members sit in the office and wait for struggling small business owners to walk in the door and ask for help or money-or let the Small Business Development Center do the same.

That's a mistake, of course. There's always power in synergy where public policy is concerned-and especially in economic development. Now that the SBA is revived, state and local officials should match those resources up with their own strategic goals, making sure the businesses being helped and funded are the ones targeted to help grow the economy.