It’s Small Business Week – Why The SBA Should Be Uninvited.

Their Small Isn’t Our Small.

In recent years the SBA has proactively, aggressively, and steadily moved away from serving the 98% of business with 1-19 employees, and is now focused almost solely on the top 2% of the largest corporations in America. In the last decade, no organization has been less helpful and more hurtful to small business in the U.S. than the SBA.

The 98% vs the 2%
29.1 million, or 98% of businesses in America, have 1-19 employees (2011 US Census data, including non-employer businesses). Of the other 2%, 1.9% of them have 20-100 employees, and 100+ employee corporations constitute only a tiny tenth of a percent (00.1%) of all businesses. Yet the SBA has evolved into the guardian of the 2%. Just about every statistical category shows the SBA has left the 98% behind.

The SBA – “Hey, Let’s Make Big, Small”
From 2008 to 2013, Karen Mills, the previous SBA Administrator, led the largest expansion of the definition of “small” in the 61-year history of the SBA. It is only partially completed – the expansion continues today under the new Administrator. So far it has resulted in 66,600 large corporations with up to $35.5 million in revenue and 1,500 employees being reclassified as “small”. The continuing reclassification will possibly include a hundred thousand more giants in the next couple years. All of these newly and absurdly classified “Smalls” are in the top 1/10th of one percent of the largest businesses in America.

How has this hurt true small business – the 98% with 1-19 employees?

Fewer Loans to Bigger Businesses
The 98% need loans of $50,000 to $250,000 – rarely more. According to Terry Sutherland, SBA Press Office Director, in 2008, the average SBA loan was $182,000 and 24% of them were under $100,000. In 2013, after the expansion, the average SBA loan is a bloated $547,000 and less than 9% of them were under $100,000.

Year – – – – – – SBA Loan Size – – – – % Loans below $100k
2008 – – – – – – $182,000 – – – – – – – – – – – – 24%
2013 – – – – – – $547,000 – – – – – – – – – – – – – 9%

The reclassification of 66,600 “Bigs” to “Small” allowed banks to give a reduced number of loans to a lot fewer, much bigger companies, and still proclaim they are serving the small business community. The SBA got on the bandwagon and released countless press releases touting how much more they have loaned to “small” businesses in the last three years. But the fact is that this simply made even more big businesses the focus of what used to be the Small Business Administration.

Venture Capitalists – The New Darling of the SBA
Over the last six years the SBA has also gotten in bed with venture capitalists, who have no interest in small business. Scott Case, a favored DC venture capitalist, has worked very aggressively with politicians to redirect the efforts of the SBA to venture capitalists and away from small business. Case has famously said, “If you sit in a room of 200 startups, and you ask which of them are small businesses, no one will raise their hand. What they’ll tell you is that they are giant businesses that just haven’t scaled yet.”

Billions Redirected to VCs, Away from Small Businesses
The result? In 2012 the SBA committed $1 billion through a program called SBIC, directly to venture capitalists to invest. In 2013, the SBIC venture capital loans were over $3.5 billion. Those funds go directly to venture capitalists, not a penny of it goes directly to small business owners. Venture capitalists like Scott Case do not invest in plumbers, restaurants, local retailers, or other 1-19 employee businesses. You also have to be a C Corporation to qualify, an entity structure that makes no sense for most small businesses. These billions are not set aside for the 98%, or even directly the 2%, but for venture capitalists.

Helping The Bigs Hurts The Smalls
Just about everything the SBA does these days makes success easier for large corporations and harder for small businesses. Every time the SBA gives a loan to a large corporation it allows them to expand and go after the customers of the underfunded 98%, and every dollar spent on an SBIC is unavailable to a true small business.

So What Is “Small?”
The SBA now absurdly defines “small” as 500 to 1500 employees, and up to $35.5 million in revenue.

The European Union defines small as 10 employees. In 2009, Australia passed the Fair Work Act, defining “small” as 15 or fewer employees. Congress usually defines it as 20-25 employees, rarely as many as 50. The general public overwhelmingly defines small as 1-19 employees – the 98%. But by no definition is 1,500 employees or $35.5 million, “small”, except at the SBA. As we celebrate Small Business Week, the SBA continues to work relentlessly to expand that definition.

Will The SBA Once Again Champion Small Business?
The SBA has a new Administrator, Maria Contreras-Sweet. Will she reverse this infatuation with the 2% of Bigs and get back to a focus on the 98% of Smalls, or will she continue to steer the Small Business Administration in the direction of the Bigs? The first two things she can do is 1) stop the ongoing expansion of the definition of small and 2) stop funding venture capitalists. These and many other steps are needed to get the SBA back in touch with the 98%. Until then, the SBA has no place in Small Business Week, because it has lost its way as the advocate of small business.