Small Business Administration

The U.S. Small Business Administration (SBA) was created by Congress in 1953 as an independent agency of the federal government. Its function, as articulated in its mission statement is to “aid, counsel, assist and protect the interests” of small businesses, to preserve free enterprise and to maintain and strengthen the economy.

The SBA fulfills its mission by offering loans, loan guarantees, government contracts, financial counseling and other forms of assistance to America’s small businesses, defined as any business that:
  • Is organized for profit.
  • Has a place of business in the United States.
  • Operates primarily within the United States or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
  • Is independently owned and operated
  • Is a sole proprietorship, partnership or corporation.
  • Is not dominant in its field on a national basis.

To categorize businesses, the SBA has established standards for every private sector industry in the United States, via the North American Industry Classification System (NAICS). NAICS standards use the number of employees and/or average annual receipts to determine which businesses are considered small, and these standards are industry specific. For example, to be considered small, a manufacturing business cannot exceed 500 employees; wholesale trade companies cannot exceed 100 employees; retail trade is restricted to annual receipts of $7 million; and general and heavy construction must be below receipts of $33.5 million.

SBA’s History

The modern SBA has had several predecessors and affiliates:
1932 President Herbert Hoover creates the Reconstruction Finance Corporation (RFC) to alleviate the financial crisis of the Great Depression. The RFC was a federal lending program for all businesses, large and small, that needed to borrow money to survive. It was continued by President Franklin D. Roosevelt.
1942 Congress creates the Smaller War Plants Corporation (SWPC) to help smaller businesses compete in the production of war material. The SWPC provided direct loans to small businesses, encouraged financial institutions to advance credit to them, and advocated on their behalf with federal procurement agencies.
1945 After World War II, the SWPC dissolves, and its lending and contract functions move to the RFC. The Office of Small Business (OSB) in the Department of Commerce also assumed some of the defunct agency’s responsibilities, concentrating on educating and counseling entrepreneurs.
1951 During the Korean War, Congress creates the Small Defense Plants Administration (SDPA) to handle small business concerns and certify those that are able to fulfill government contracts. By 1952, President Dwight Eisenhower proposed the creation of the SBA to continue the functions of the RFC, which was in danger of being abolished by Congress.
1953 Small Business Administration (SBA) created by Congress.
1958 The Small Business Investment Company (SBIC) Program is established to regulate and help provide funds for privately owned venture capital investment firms.
1964 The SBA creates the Equal Opportunity Loan (EOL) Program to relax the credit and collateral requirements for small businesses whose owners live below the poverty line and cannot attract adequate financial backing.

Today, the SBA has at least one office in each state, employs more than 2,000 people and has an annual budget of $985 million. The agency provides services to more than 1 million entrepreneurs and small business owners annually. In January 2012, President Obama elevated the SBA into his Cabinet, a position it last held during the Clinton administration.

SBA’s Programs

Generally, the SBA does not provide direct loans, but instead partners with banks, credit unions and other lenders. Two exceptions are its Disaster Relief Loan Program and PRIME program.

The SBA provides assistance through its four main programmatic functions — access to capital, entrepreneurial development, government contracting and advocacy — all of which are free to any small business that applies.

Access to Capital

The SBA loans that are made by its partner banks, credit unions and other lenders are partially guaranteed by the federal government. They help finance small businesses that may be denied funding under conventional lending guidelines. SBA loans and lines of credit can help businesses start or grow, buy real estate or build, and/or buy existing businesses.

Disaster Relief Loan Program

This initiative provides low-interest loans to homeowners, renters, businesses of all sizes, and most private nonprofit organizations to replace or repair property and assets that have been damaged by a natural disaster.

PRIME Grant Program

The Program for Investment in Micro-Entrepreneurs (PRIME) provides grants to help low-income entrepreneurs gain financial backing to establish and grow their small businesses.

7(a) Loan Program

This program is designed to help start-up and existing small businesses obtain financing. The loan limit is $5 million.

Types of 7(a) Loan Programs include:
  • Express Programs for borrowers from distressed communities and others.
  • Export Loan Programs for small export businesses.
  • Rural Business Loans for rural and small community borrowers.
  • Special Purpose Loans to aid businesses negatively impacted by the North American Free Trade Agreement (NAFTA).
  • Patriot Express Pilot Loan Initiative for active military, veterans and their families.

CDC/504 Loan Program

This is a long-term financing tool, designed to encourage economic development within a community. It provides funding for the purchase or construction of real estate and/or the purchase of business equipment and machinery. Lenders provide 50 percent of financing, the CDC (Certified Development Company) created under the program provides 40 percent, and the applicant 10 percent.

MicroLoan Program

The program provides small, short-term loans to small businesses and certain types of nonprofit child care centers. The maximum loan amount is $50,000. The monies can be used as working capital, to purchase inventory or supplies, furniture or fixtures, and/or machinery and equipment.

Military Reservist Economic Injury Disaster Loan Program (MREIDL)

This program is designed to help small businesses that lose essential employees when individuals are called up to active duty. Loans can be up to $2 million, and the borrowing company has a maximum of 30 years to repay.

Venture Capital

The SBA licenses and regulates Small Business Investment Companies (SBICs), which are privately owned and managed investment funds. These companies use their own capital, plus monies borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses. There are more than 300 licensed SBICs in operation today.

Entrepreneurial Development

The SBA provides free training and counseling to entrepreneurs and small business owners in more than 1,800 locations throughout the United States and its territories. It provides grants to operate approximately 900 Small Business Development Centers, 110 Women’s Business Centers, and 350 SCORE chapters (a volunteer mentor corps of retired and experienced business leaders).

8(a) Business Development Program

This program assists in the development of small businesses owned and operated by individuals who are socially and economically disadvantaged, such as women and minorities.

HUBZone

An SBA program for small companies that operate and employ people in Historically Underutilized Business Zones (HUBZones).

Government Contracting

The SBA’s Office of Government and Contracting works with other federal departments and agencies to ensure that 23 percent of prime federal contracts are awarded to small businesses, with not less than 5 percent to woman-owned small businesses and small disadvantaged businesses, and not less than 3 percent to service disabled veteran-owned small businesses and certified HUBZone small businesses.

In 2011, more than $90 billion worth of federal contracts went to small businesses. This office also provides information and outreach to small businesses about procurement opportunities.

Small Business Innovation Research Program (SBIR)

This program encourages small businesses to explore high-tech innovation and compete with larger businesses by reserving a specific percentage of federal Research and Development (R&D) dollars for small business. Eleven federal departments and agencies are required to reserve a portion of their R&D funds for this program.

Small Business Technology Transfer Program (STTR)

Five federal departments and agencies reserve a portion of their R&D funds for small businesses that partner with a nonprofit research institution.

Advocacy

The SBA acts as the voice for small business and conducts research on the small business environment. The Office of Advocacy testifies to Congress on behalf of small business. The Office of the National Ombudsman assesses the impact of regulations.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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