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SBA: Helping Hand for Small Firms or Welfare for Weak?

March 24, 1985|PAUL RICHTER | Times Staff Writer

The 1971 California earthquake cracked the walls of Pietro Vitale's San Fernando pizza factory, and would also have tumbled the firm into bankruptcy, had it not been for a $400,000 loan from the Small Business Administration.

Three years later, the agency generously guaranteed a $388,000 loan to Vitale, and in 1981, when Oh Boy Corp. again teetered at the brink, the SBA came across with a $425,000 loan.

"The SBA has saved our skin again and again," says Vitale, an exuberant native of Naples, Italy, who was once the top-selling Good Humor man in Eagle Rock. "And now--now I'm a success."

Officials of the Reagan Administration might offer a different description for Oh Boy, which has lost money in three years since 1970 and which came close three other times. They would probably describe the company as an "economic straphanger"--a weak firm that has been able to survive and compete only by dint of an open-handed Small Business Administration.

Help Small Firms

The Administration's objections to such subsidies are a key reason that officials this year proposed to abolish the agency, an Eisenhower-era creation that was intended to stimulate business start-ups and help small firms better compete with large ones for credit.

The Administration's initiative has renewed debate on whether the SBA gives a deserved lift to would-be entrepreneurs, or whether it is simply the designated welfare agency for the nation's 14 million small businesses.

While it seems unlikely that the proposal will win congressional approval in 1985, many observers believe that the issue will continue to simmer in years ahead as the Reagan Administration continues efforts to pare the size of government.

Critics, including Budget Director David A. Stockman, maintain that there is no economic rationale for the SBA, since its loans go to only 2% of small businesses. Rather than bolstering a disadvantaged economic sector, they contend, the loans amount to gifts for a minority that is too weak to compete.

Critics also contend that the loan programs are wasteful and too easily abused, and that they have served as little more than a pork barrel for congressmen and senators who wish to dish out money to politically potent small business constituents. Legislators have used the agency in recent years to dispense loans to border-town retailers hurt by a devalued Mexican peso, tourist businesses hurt by gas-shortage scares, and even fertilizer salesmen hurt by federal regulations.

The Administration has proposed to do away with the agency's programs of direct loans, guaranteed loans and disaster loans, which last year distributed $3.4 billion to 21,500 businesses. It would transfer to the Commerce Department such remaining activities as its minority aid, small-business counseling and programs for setting aside a portion of government contracts for small businesses.

Stockman says abolition would cut the deficit by $1.5 billion a year if the agency's loan portfolio is sold. Beyond cash received for the loans, a sale would save on staff and other operating expenses.

Resisting the proposal are a coalition of the program's small-business beneficiaries, a host of congressional allies, and banks. The SBA's administrator, James C. Sanders, officially supports the Administration's proposal but has mounted a quiet rear-guard action to preserve its autonomy.

The Reagan Administration has already substantially reduced the size of the agency. Since 1980, the SBA payroll has fallen 20%, to 4,900 employees; in the last three years, direct loan volume has been cut 40%, and guaranteed loan volume 12%.

The agency's loan programs have been accused of both waste and abuse from the beginning.

John Luke, an associate director of the General Accounting Office, the watchdog agency, says the agency's 32-year record is "replete" with examples of bad SBA loans.

Too Eager to Lend

They arise, he says, partly because the agency's mission is to help fledgling firms that are less credit-worthy than those that could turn to banks to raise capital. But the agency also has been too eager to pump loans out the door, "and not enough concerned with getting creditors to pay them back," Luke adds. Such practices have pushed the SBA loan default rates to a peak of 23% in 1982.

Critics such as Stockman suggest that loan dollars flow most readily to "government-wise" applicants who are eager to take advantage of the SBA program's special attractions--among them, longer pay-back periods than are commercially available. While banks are reluctant to lend for more than three years, SBA loans average between seven and 10 years.

To be eligible for SBA money, applicants must demonstrate that their loan requests have been turned down by two banks. But those seeking SBA money say such rejections are easily obtained.

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