The New York Times
By: Robb Mandelbaum
March 29, 2012
Much has changed since Karen Mills, the administrator for the Small Business Administration, first sat down with us back in the fall of 2009. The economy is improving, unemployment is falling, and S.B.A. lending is back to pre-recession levels. Ms. Mills's agency, however, still faces pressing challenges. Fewer S.B.A. loans are reaching the smallest, underserved businesses. And both the agency and the Obama administration are under intense pressure to show that they are creating jobs, even as the White House proposes new cuts to the S.B.A. budget.
Last week, The Agenda sat down with Ms. Mills once more to discuss some of these issues - and to ask her questions submitted by You're the Boss readers. What follows is a condensed version of that conversation. Special thanks to the readers who submitted questions.
Q. John Cooper wrote to share his suspicions of guaranteeing bank loans to small businesses: ''It goes without saying that if a commercial bank loan needs an S.B.A. guarantee, then it must not be too creditworthy to begin with.'' What is the S.B.A.'s mission in lending?
A. Our role is to provide access and opportunity. Let's say you are a really good small business, and the banks says the last two years have been a little tough, you don't quite meet my standards, but I'd like to give you the loan. That's when they use the S.B.A. guarantee. And these loans actually perform really well. Our loss rate is really 2 percentage points higher than the average of all losses. So for the risk we are taking, these are people who should get credit but the market is not functioning perfectly. And that is where we step in.
Q. Michael J. Knight, an accountant in Fairfield, Conn., asks, ''Why isn't there a streamlined application for businesses that invest in getting it right -- such as by meeting regularly with accountants, preparing monthly financial statements, establishing internal controls? They don't get any more consideration by the S.B.A. than the guy who has no books and uses Score to prepare his loan application.''
A. We have a streamlined loan application now really for everyone - we want everybody to be able to do it well. That is why we have Score representatives, that is why we have Small Business Development Centers, and we can help a small business who may not have the experience to prepare a banking package.
Q. Everybody complains about the paperwork on S.B.A. loans - why does the process take so long?
A. Our turnaround time for loans is 10 days. The paperwork is actually not very much -- and we have taken it down. Our CapLines program -- which we just redid -- had 46 forms. Now it has eight, and they are optional. What takes the time is the small business preparing the application, answering questions. And that is why I say, go first to one of our counselors -- remember they're free. Spend the time getting yourself ready.
Q. But you hear these stories - one loan broker told us that if he takes a client for an S.B.A. loan, it takes at least 11 weeks to close. But if he takes a client to a community bank, it's four weeks.
A. I don't think that would be substantiated overall. Banks are working with mostly their own documents. There is not a major set of incremental documents for the S.B.A.
Q. Will counselors really help you with the loan documents?
A. Absolutely. For example, in the height of the crisis, when a lot of people were getting turned down by their banks, our North Carolina Small Business Technical Development Center said, ''Everybody who's rejected, you come to us, and we will work with you on the bank package.'' They got 70 percent of them creditworthy. And then when they got before the banker, they had success.
Q. Ryan Austad tweeted a question on microlending - he'd like to know about average terms, rates, and requirements, and length of time typical for the process.
A. We have 120-odd active microlenders all over the country. We put capital into these microlenders and they lend it and they relend it. We give them a very good rate - one, one-and-a-quarter percent - that's a discount off the market rates. They then pick the rate that they make the microloan at, and they set the timing. And the amount of money microlenders have to lend went from around $120 million in 2008 to $340 million now. But in microlending, it's not just the money. They provide an enormous amount of technical assistance. Failure rates for start-ups are high, and the more we can reduce the failure rate, the more jobs we have.
Q. Why then is the Obama administration proposing to cut technical assistance for microlending by about 20 percent from 2010, especially if the pool of capital has grown?
A. What we have done is instead of a silo - like microlending technical assistance only going to microloans - we have created an entire network of our women's centers, which are in these same communities; our Small Business Development Centers; our Score representatives all now linked, leveraged, and aligned on the ground. A small business needs to have seamless access. We want them to walk through any door, whether it's an S.B.A. door, or the U.S. Department of Agriculture, and find their way to our loan program, find their way to a counselor who can solve the kinds of questions, needs and frustrations that your readers have. So looking at numbers in silos does not necessarily give you the best bang for the taxpayer's buck.
Q. Why is the S.B.A. making fewer small 7(a) loans than in years past and why is the average loan size bigger?
A. That's a great question, because S.B.A. had a record year. We are back to above the 2008 levels of lending in dollars, but there's still a gap, as you point out. Small-dollar loans to under-served communities are not back. The big banks, which made a very large number of the small loans in 2005, 2006, and 2007, withdrew from the market. And now we have to bring them back into the market, and we have to reach into other really viable lenders who will be more in touch with some of these underserved communities. So that is why we gave every partner that we've got on-the-ground access to the S.B.A. guarantees through a program we have called Community Advantage.
Q. You don't think it's because of the way Congress and the S.B.A. have ratcheted up the size standards for small companies, making bigger companies eligible for the loans?
A. No. We know why lenders are not making these loans. They pulled back from the small loan market in large numbers during the crisis, because of the risk. And now coming back in, it's just as costly to make a small loan as a big loan. They're coming back in for the big loans first, which are more profitable, and we have pushed them to come back to the small loan market.
Q. Everybody calls the new JOBS Act, which has the enthusiastic backing of President Obama, a small-business bill, but its main provision is designed to help companies with up to $1 billion in revenue. How is a billion-dollar company small?
A. Well, Congress has worked through a number of these parameters. I wouldn't want you to think that, whatever the parameters in this particular bill, they are going to be the same as they are going to have at the S.B.A. on other things. But a lot of the cost of an I.P.O. is associated with some of the reporting. Small businesses clearly don't have that free cash flow and staff, and there is a fair bit of consensus around the notion of an on-ramp, a middle ground that you can stage these requirements and still give investors adequate information flow.
This works on the very, very high-growth companies. The data shows that some of these high-growth companies add most of their employees after they go public. Instead now, there is a lot of academic documentation about how these same companies are getting bought, and that they don't then grow as individual entities. You have to make sure the door is open for a very, very accelerated growth rate. And that's a public market.