What’s in a Name? A Reflection on the SBA

The Small Business Administration (SBA) recently announced it is expanding regulation in light of recent abuses. As The Washington Post reported recently, some large firms have been using small businesses as front groups to gain government contracts. Yet this is a good time to ponder the need for such an agency.

There is something deeply ironic about a federal government agency being tasked with promoting free enterprise and entrepreneurship. Yet that is precisely the SBA’s mission. As a federal bureaucracy, it is in an awkward position to carry it out.

The SBA exhibits an inherent conflict of interest. Does it function for the sake of small business owners or that of the hand that feeds it — the federal government? On its face, it would appear that the SBA indeed works to advantage small businesses, and certainly there are many sincere, hard working employees who believe they are doing just that.

But as is the case with many government programs, good intentions rarely survive political reality. The Small Business Administration is no exception.

Consider the SBA’s 7(a) Loan Program, which the agency describes as “the SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels.”

Yet if a start-up venture or existing business could not receive a loan through “normal lending channels,” it is most likely because private investors do not believe the project has a good chance of being profitable. The government gets normal lending channels to fund these small businesses by partially guaranteeing the loan — with tax dollars. For fiscal year 2011, the SBA asked Congress for “$165.4 million of credit subsidy budget authority to support a program level of $17.5 billion, which includes $16 billion in term loans and $1.5 billion in revolving line of credit facilities” for this program.

So the SBA is using tax dollars to guarantee loans to small businesses and ventures which the market has already deemed not worthy of credit. This lowers the incentive to develop and maintain good business practices. Why do I have to work hard to keep my business credit-worthy? The government will make sure I get my loan.

As an unintended consequence, credit-worthy businesses are forced to compete with subpar companies that are being sponsored by the government. Also, low-quality services and products flood the market, bringing down the true value of such commodities. All of these in turn hurt the marketplace and the consumers at large.

Such a program shows complete disregard for basic standards of business. To truly promote free enterprise and support small businesses, the SBA and its short-sighted programs should be sharply cut back.

Like the businesses it serves, the Small Business Administration should be small, if it is to exist at all.