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Report | May 12, 2020

A Brief History of the SBA

Anti-MonopolySmall Business Administration

In the past month, the Small Business Administration (SBA) has gained widespread media attention. This research report reviews the little-known agency’s history.

1932: President Hoover set up the Reconstruction Finance Corporation (RFC) to provide credit resources directly to financial institutions and railroads and indirectly to business, industry, and agriculture.[1]

1942: The Small Business Act of 1942 created the Smaller War Plants Corporation (SWPC), which was a temporary wartime agency to assist small firms assisting with defense production during WWII. After the War ended, the SWPC’s functions were partially taken over by the RFC and partially transferred to the “Office of Small Business,” which was housed within the Department of Commerce.[2]

1944: The Servicemen’s Readjustment Act of 1944 gave the Department of Veterans Affairs the authority to guarantee business loans to veterans. During the Korean War, another wartime agency, Small Defense Plants Administration (SDPA), functioned similarly to SWPC and worked with RFC.[3]

1953: The Small Business Act, signed into law by President Eisenhower in 1953, created the Small Business Administration (SBA) to promote the interests of small businesses to enhance competition in the private marketplace.The SBA assumed some of the functions of the RFC, which was created in 1932 to provide funding to businesses affected by the Great Depression and WWII.[4]

1970: President Nixon signed Executive Order 11518 into law, which provided for the “increased representation of the interests of small business concerns before departments and agencies of the United States Government.” The executive order directed the SBA to act as a “spokesman and advocate” on behalf of the small business community and “advise and counsel small business concerns in their dealings” with other federal departments and agencies. The executive order also authorized the SBA’s participation in investigations, hearings, and other proceedings before federal agencies to ensure the views of small businesses were presented.[5]

1973-4: Several business organizations, including the Smaller Business Association of New England (SBANE), pushed to strengthen the SBA’s advocacy role, leading to the adoption of Public Law 93-386, which established the Chief Counsel for Advocacy. The SBA’s Chief Counsel for Advocacy had the following duties: 1) develop proposals for changes in the policies and activities of any agency and 2) represent the views and interests of small businesses during other federal agencies’ policy considerations and activities.[6]

1976: The SBA Office of Advocacy was created to support the Chief Counsel in their efforts to advocate on behalf of small business interests in policy-making processes in other federal agencies.[7]

1977: It was discovered that white-owned businesses were fraudulently applying to SBA’s 8(a) program, which was designed to help minority-owned businesses secure contracts with the federal government. A regional SBA official reported that the 8(a) program was “out of control.” Actual black-owned businesses that received contracts under 8(a) reported that the SBA did not provide them with enough technical guidance and help. One black small business owner reported that he was offered a split contract with a company headed by the brother-in-law of the SBA’s assistant regional director in Atlanta.[8] The SBA also awarded 8(a) contracts to two former Nixon administration aides and a former SBA official.[9] Former District Commissioner John Duncan, who owned a construction firm with no assets or employees also secured a contract through the SBA’s 8(a) program. Duncan apparently then subcontracted all the work given to the firm to white contractors.[10] The SBA began an investigation into the 8(a) program in 1978.[11] SBA Administrator Vernon Weaver said the SBA failed to track minority-owned businesses that received 8(a) contracts. He testified that fewer than 40 of the ~2,400 companies that received contracts were known to be in operation at the time of his testimony.[12] In 1979, after the SBA Inspector General found that one in five firms that received 8(a) contracts was a front, SBA Admin Weaver warned 300 firms with contracts to “straighten up” or be eliminated in 30 days.[13]

1979: The SBA launched a streamlined program to sell SBA-guaranteed loans in the secondary market. This program would relieve the SBA of approving loans, and instead give that power completely to banks.[14]

1979: The GAO reported that the SBA failed to fulfil its promises to strengthen the credit approval and servicing activities of its regular business loan program. The GAO reported that, although SBA’s operating procedures provided a sound basis for evaluating loan applicants, the SBA in practice ignored its own rules, in part due to a shortage or misuse of district office personnel. But the GAO found that the SBA had not filled all positions authorized by Congress, and SBA field offices continued to process and service loans without performing adequate analysis.[15]

1980: SBA changed how to determine whether a business is “small” from considering several factors—how much money a company earns, how many people they employ, as well as the type of assistance requested—to just how many employees a company has.[16]

1980: The Regulatory Flexibility Act was signed into law. The legislation requires agencies to consider alternative ways of reducing the economic impact of regulations on small entities.[17]

1980s: Under Reagan, the SBA saw massive budget cuts, and Reagan even tried, unsuccessfully, to shut the agency down.[18] The SBA Administrator Charles Heatherly “was seen as working to close down the agency in all but name.”[19] The National Association of Guaranteed Government Lenders was leading the charge to save the SBA and the Heritage Foundation was calling for the SBA’s abolition.[20] While they did not succeed at abolishing the agency, the Reagan Administration did substantially reduce the size of the agency: SBA payroll fell 20% and the direct loan volume declined 40%.[21]

Late 1980s-1990s: SBA stopped direct lending to businesses that banks had rejected/underserved businesses.[22]

1993: Erskine Bowles, Bill Clinton’s first Small Business Administrator, proposed a 17% cut to SBA’s budget[23] and encouraged making the agency more “efficient” by outsourcing loan activities.[24]

1994: The SBA had trouble getting disaster loans to businesses affected by the Northridge earthquake.[25]

1995: After the SBA faced budget cuts, lenders questioned whether the agency should stop guaranteeing loans.[26]

2000: The GAO reported that “aggressive outsourcing” and “privatization” hampered the SBA’s ability to oversee its loan programs.

2001: The Bush Administration proposed to cut the SBA’s budget by 40%. The Administration’s goal was to cut the 7(a) loan program budget and instead have the program fund itself by imposing higher fees on borrowers seeking loans more than $150,000. The Administration’s budget also sought to cut several programs, including the New Markets Venture Capital program.[27] Over the 8 years of his presidency, Bush succeeded in slashing the SBA’s budget by 30%.[28]

2001: The SBA issued $140 million in disaster loans to small businesses in Florida following the 9/11 attacks. Among Florida businesses that received 9/11 response loans were a plastic surgeon and a supplement manufacturer.[29]

2005: The GAO reported that the SBA struggled to process disaster loans following Hurricane Katrina The report found that the SBA lacked a timetable for completing a disaster management program and failed to prepare effectively.[30]

2006: The House Small Business Committee found that hundreds of 2005 contracts tagged as being held by small businesses were actually held by large corporations including AT&T and Home Depot.[31]

2009: SBA-backed lending plunged 27%.[32]

2009: The American Recovery and Reinvestment Act allocated $730 million for SBA programs, including: 1)  $375 million to temporarily reduce fees borrowers paid for loans and to increase the SBA’s guarantee on loans to 90%; 2) $255 million for new loan program to help small businesses meet existing debt payments; 3) $30 million for expanding SBA’s Microloan program; 4) $20 million for technology systems to streamline SBA’s lending and oversight processes.[33] 

  • One of the programs funded by ARRA was “America’s Recovery Capital” (ARC), which provided interest-free loans to struggling small businesses. Five months after the program’s introduction, its legislative sponsor was calling for its termination. According to her, the program was “plagued with difficulties and fell short of its goals.”[34]

2009: The GAO reported that, under a program called HUBZone, 19 companies were improperly awarded federal contracts that were supposed to go to small businesses in underserved areas. The report found that the SBA failed to oversee the program effectively.[35]

2010: President Obama signed the Small Business Jobs Act into law, which increased the amount of loans the SBA guaranteed and lowered 7(a) loan fees.[36]  After the law was passed, SBA lending rose nearly 30%.[37]

2011: The SBA overhauled the rules of its 8(a) Business Development program, which helped minority owned small businesses get contracts with the government, in an attempt to reduce fraud. This change was in response to larger businesses using small businesses to fraudulently get government contracts.  For example, in 2010, a large technology firm, GTSI, used two small firms to improperly get a contract with DHS.[38]

2012: President Obama cut the SBA’s budget from its high level throughout the response to the recession. The SBA planned to find $8 million in savings by reducing the core staff for its disaster loan program.[39]

2012: PresidentObama elevated the Small Business Administrator to cabinet rank.[40] Obama also proposed consolidating the SBA with the US Trade and Development Agency, Overseas Private Investment Corporation, Export-Import Bank, Office of the US Trade Representative, and some Commerce Department programs. The small business community worried that this consolidation would lump small and large companies together.[41] The proposal was not adopted.

2012: The SBA was criticized for its response to Hurricane Sandy, according to a GAO report. The Report found that the agency took roughly twice as long as intended to approve disaster loans.[42]

2014: The SBA had the smallest budget of any federal agency at $929 million (compared to $573 billion for the Pentagon.[43] The House Small Business Committee cut the SBA’s proposed FY2015 budget by $50 million.[44] Lawmakers criticized the SBA for its proposed allocation of money.[45]

2014: The SBA shifted more attention and resources toward supporting startups and “expansion-minded firms,” adopting a “silicon valley mentality.”[46]

2016: The SBA expanded its definition of what counts as a “small” business to include an additional 4,000 more companies.[47]

2016: President Trump nominated Linda McMahon, former WWE executive, to be Small Business Administrator. McMahon donated $7 million to Trump’s presidential campaign, including a $1 million donation just weeks before the election.[48]

2017: President Trump proposed cutting the SBA budget by 5%, or $43.2 million.[49]

2019: Washington Post uncovered that the SBA’s HUBZone program, a program that sought to award contracts to businesses in D.C.’s underserved neighborhoods, relied on outdated data leading contracts to be awarded to businesses in D.C’s richest neighborhoods.[50]

[1] “The R.F.C. Under Hoover and Roosevelt,” CQ Researcher. http://library.cqpress.com/cqresearcher/document.php?id=cqresrre1935071700

[2] SBA Office of Advocacy, Background Paper 2009-2016, 4 (October 2016)

[3] Ibid.

[4] Ibid.

[5] Ibid. 5.

[6] Ibid. 6.

[7] Ibid. 7.

[8] John M. Goshko, “SBA Minority Program Abuses Charged,” Washington Post, May 30, 1977

[9]  John M. Goshko, “SBA Benefits to Minorities Aid Well-Off,” Washington Post, July 3, 1977

[10] John M. Goshko, “D.C.’s Duncan Got Minority Aid Funds,” Washington Post, July 7, 1977

[11] John M. Goshko, “SBA Probes Overdue Minority Loans,” Washington Post, November 10, 1978

[12] John M. Goshko, “SBA Didn’t Track Firms That Left Aid Program,” Washington Post, December 5, 1978

[13] Jane Seaberry, “300 Firms Warned of SBA Crackdown, Washington Post, October 3, 1979

[14] “SBA is Announcing Secondary Loan Plan,” American Banker, May 21, 1979

[15] “SBA Failure to Improve Practices Seen,” American Banker, September 19, 1979

[16] Jerry Knight, “SBA Says Small Is Bigger,” Washington Post, March 12, 1980.

[17]  SBA Office of Advocacy, Background Paper 2009-2016, 4 (October 2016).

[18] Philip Lader, “Small Business Administration: New and Improved,” Washington Post, November 28, 1995.

[19] Rob Wright, “Abdnor Steers the SBA Up the Comeback Trail, American Banker, August 20, 1987.

[20] James C. Allen, “Group Musters Force to Fight SBA Cuts,” American Banker, December 13, 1994.

[21] Paul Richter, “SBA: Helping Hand for Small Firms or Welfare for Weak?” Los Angeles Times, March 24, 1985.

[22] Robb Mandelbaum, “Why Won’t the S.B.A Lend Directly to Small Businesses?” New York Times, March 10, 2010.

[23] Michelle Singletary, “Hill Fight Puts Entrepreneurs on Hold,” Washington Post, May 21, 1993.

[24] James C. Allen, “Success may make SBA niche lender,” American Banker, November 15, 1994.

[25] Nancy Rivera Brooks, “Borrowing Trouble: Small-Firm Owners Still Awaiting SBA Quake Relief, Los Angeles Times, April 2, 1994.

[26] James C. Allen, “Amid Cuts, Do SBA Loans For Realty Still Make Sense?” American Banker, February 7, 1995.

[27] Albert B. Crenshaw, “Business Advocates Criticize SBA Cuts,” Washington Post, May 7, 2001.

[28] Tiffany Beck, “Reinventing the SBA; Five ideas to make the Small Business Administration relevant again,” Orlando Business Journal, June 9, 2008.

[29] Sally Kestin and John Maines, “Florida cashed in on 9/11 disaster loans,” Miami Herald, September 12, 2011.

[30] Richard Wolf, “Small Business Administration scolded for Katrina response, disaster plan,” USA Today, Febrary 15, 2007.

[31] Cyndia Zwahlen, “Bigger isn’t better for federal contracts,” Los Angeles Times, March 28, 2007.

[32] Catherine Clifford, “Small biz programs on chopping block in 2012 budget,” CNN Money, February 14, 2011.

[33] Social Security Administration, “American Recovery and Reinvestment Act Helps Small Businesses,” SSA/IRS Reporter (Summer 2009).

[34] Catherine Clifford, “An emergency small business boost that fizzled,” CNN Money, January 24, 2010.

[35] Matt Kelley, “GAO report details fraud in contract program that assists small businesses,” USA Today, March 25, 2009.

[36] Summary of the Small Business Jobs Act, Senate Committee on Finance, August 5, 2010.

[37] Catherine Clifford, “$5 billion more in loans to small businesses,” CNN Money, October 4, 2010.

[38] Robergt O’Harrow Jr., “Small-business agency moves to combat fraud,” Washington Post, February 12, 2011.

[39] Catherine Clifford, “Small biz programs on chopping block in 2012 budget,” CNN Money, February 14, 2011.

[40] Matthew Yglesias, “Department of Cabinet Shuffles; Obama’s smart, doomed plan to reorganize the government to help small business,” Slate Magazine, January 19, 2012.

[41] Jose Pagliery, “Some businesses worry about Obama’s SBA move,” CNN Money, January 13, 2012.

[42] J.D. Harrison, “Disaster loan disaster: SBA much too slow to respond to Hurricane Sandy, probe finds,” Washington Post, October 27, 2014.

[43] Joyce M. Rosenberg, “Myriad concerns, needs confront SBA nominee,” Associated Press, January 23, 2014.

[44] J.D. Harrison, “House committee criticizes SBA’s budget proposals,” Washington Post, March 31, 2014.

[45] J.D. Harrison, “Both parties slam Small Business Administration,” Washington Post, May 2, 2014.

[46] J.D. Harrison, “Small Business Administration adopting more of a ‘Silicon Valley’ mentality; Do traditional mom-and-pop shops still get their fair shake?” Washington Post, October 7, 2014.

[47] Aaron Gregg, “Definition of small businesses expanded,” Washington Post, January 29, 2016.

[48] Tal Kopan, “Donald Trump’s SBA nominee gave $7M to support him,” CNN, December 9, 2016.

[49] Abha Battarai, “SBA budget cuts target ‘redundant programs,” Washington Post, March 15, 2017.

[50] John D. Harden, “Outdated data foiled effort to aid poorer areas,” Washington Post, November 20, 2019.

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