Many Americans might not have heard of the U.S. Small Business Administration (SBA) before COVID-19. In fact, the small executive agency has been involved in the federal government’s response to some of the largest economic crises and natural disasters over the past two decades. This time around, the SBA has been thrust front and center as it attempts to administer one of the largest loan programs in our nation’s history. But if our Congressional leaders had spent time understanding the SBA’s limitations, perhaps they would have paused before giving the agency free rein to hand out billions of taxpayer dollars.
Over the past few decades, the SBA has faced major issues administering the two existing loan programs the agency is using to get money to small businesses affected by COVID-19: its Economic Injury Disaster Loan (EIDL) program and its 7(a) program.
The SBA’s EIDL program provides direct emergency loans of up to $2 million to small businesses affected by disasters. In late March, Congress appropriated $10 billion to the SBA’s EIDL program in an effort to provide instant cash to businesses that had already been affected by the pandemic. Still, many businesses have yet to receive any funds.
Unfortunately, the SBA’s inability to quickly get these funds to struggling small businesses appears to be par for the course for the agency. In the past, SBA has been criticized for failing to process EIDLs and other disaster loans in a timely manner following major disasters. The SBA Office of Inspector General (OIG) has repeatedly questioned whether EIDLs were getting to the small businesses that actually needed them.
In the wake of the 2005 hurricanes, the OIG reported that the SBA disaster loan office had not sufficiently staffed up to handle the surge of loan applications, in part because the agency failed to accurately identify the number of staff members required to respond to the crisis. Even after these warnings, the Government Accountability Office (GAO) found that the SBA once again failed to staff up its disaster assistance office after Hurricane Sandy, nearly a decade later. According to GAO’s report, the SBA was not prepared for such a high volume of applications and failed to update “key disaster planning documents to adjust for effects of such a surge in the future.”
In addition to its disaster loan programs, the SBA has also struggled to oversee its 7(a) loan program, which involves the SBA guaranteeing private bank loans. The CARES Act created a special type of 7(a) loan program called the Paycheck Protection Program (PPP), which allows the 7(a) loans to be forgiven so long as businesses spend the money on certain expenses, including payroll, benefits, rent, mortgage payments, and utilities.
As recently as 2019, the OIG reported some of the same weaknesses in 7(a) loan oversight we have witnessed in today’s PPP. For example, the OIG wrote that the SBA lacked oversight strategies to prevent 7(a) loan fraud. Additionally, the agency had not been effectively tracking loan agent activity, according to the report. Questions have also been raised about whether the SBA was ensuring 7(a) loans were actually getting to the small businesses that the program was designed to serve. Considering these findings, the SBA OIG and GAO have repeatedly pushed the SBA to conduct more oversight of its 7(a) loan program.
Beyond its issues with the EIDL and 7(a) loan programs, the SBA has also struggled to oversee previous economic stimulus programs. The OIG reported that, when administering these stimulus programs, the SBA has failed to (a) communicate regulations to lenders and small businesses, (b) require participants to submit proper documentation, and (c) keep accurate data to monitor the loan programs’ performance. This sounds eerily familiar.
After decades of warnings, it may seem baffling that the SBA has not taken serious steps to address its oversight and infrastructure issues. But, in truth, Congress and past administrations have failed to provide the agency with the funding and resources needed to solve these problems. Since Trump’s inauguration, the SBA has seen an almost 24% budget cut. Compare that with an 18% increase in defense spending since 2016. Just this year, the Trump Administration called for an 11% cut in the SBA’s budget. While the SBA often receives hefty supplemental appropriations in the wake of economic and natural disasters, the agency has not received sufficient funding during times of economic stability to prepare itself for the next crisis. It’s harder to fix problems without properly identifying them first, and yet the SBA Office of Inspector General has not seen a meaningful increase in staffing or funding in ten years.
The SBA has also faced frequent turnover in its leadership and lacks experienced and well-trained staff. According to the OIG, the agency has not taken meaningful steps to fix its staff’s gaps in competency and institutional knowledge since these issues were first reported over a decade ago.
Adding to staffing issues, the SBA’s infrastructure and technology is inadequate—some of which has not been updated since 2002. That’s why there was no reasonable chance for the SBA to scale up to oversee both massive COVID-19 response loan programs in just a matter of days. But Congressional leaders failed to provide even the most basic safeguards to ensure at least some success.
Instead, Congress entrusted hundreds of billions of taxpayer dollars to the SBA without meaningful oversight or resources. Both loan programs ran out of money within days. Even more alarming, large portions of that money failed to get to the small businesses most affected by the crisis.
So what could our Congressional leaders have done to better equip a limited SBA to oversee such a massive loan program? At the very least, they could have given the SBA the resources necessary to effectively oversee private banks’ allocation of the 7(a) funds. Congress could have beefed up funding of the House Committee on Small Business, which remains the single least-funded of the 20 standing House Committees, receiving only 2% of committee funding. The consequences of little oversight have become painfully clear in the last few weeks: private lenders have given their richest clients special treatment, and publicly traded companies with access to capital markets have been awarded millions of dollars in 7(a) loans. Meanwhile, 92% of small businesses report that they have not seen a dime.
Congressional leaders could have chosen to follow the example of many European governments, which agreed to directly cover 70%-90% of business’s payroll and rent costs. The British government, for example, has pledged to cover 80% of UK businesses’ payroll expenses through its tax collection agency, HMRC. This type of direct appropriation administered by the Treasury Department, which has been proposed by Rep. Pramila Jayapal (D-WA) and Congressional Oversight Committee member Bharat Ramamurti, might have allowed funds to be allocated more efficiently and equitably.
Instead of having all businesses with fewer than 500 employees battle each other for access to a first-come, first-serve pot of money, Congress could have set aside a portion of the funds for small businesses with 25 or fewer employees, as antitrust expert Tim Wu suggested. This option might have implemented some safeguard against private banks’ favoritism toward their bigger clients.
These measures seem like the least Congress should have done if they had an accurate understanding of the SBA’s limitations. But I’m left wondering why the SBA—the one agency tasked with supporting small businesses—has largely been defunct over the past few decades. Why has Congress and past administrations failed to give the SBA the resources it needed to protect small businesses from closures during massive crises like today’s?
Disaster after disaster, we expect the SBA to overcome years of budget tightening in a matter of weeks—sometimes days. But huge supplemental appropriations like those provided by CARES Act work much like a bandaid on a bullet wound. If Congress and the White House continue to neglect the SBA during times of economic stability, large companies will win out and claim an even larger stake in the American economy when crises like today’s hits. What the SBA needs is sufficient funding every year so that it can effectively prepare for the next slew of inevitable crises. Maybe then the SBA can become a strong voice for small business interests.