SBA-The Role of Government and SME Finance Richard Ginsburg Senior International Trade Specialist Office of International Trade Richard.Ginsburg@sba.gov
What s so important about Small Business? Small Business is Driving Economic Growth in the United States! Small businesses have provided virtually all of the nearly 20 million net new jobs added to the economy since 1992. The approximately 29 million small businesses in the U.S. represent 99.7 percent of employers and employ 53 percent of the private workforce. Small business accounts for approximately 50 percent gross domestic product and 55 percent of technological innovations. Small business is especially concentrated in services and technology, the fastest growing business sectors in the United States.
What s so important about Small Business? Small Business is Community Oriented! Small businesses provide 67 percent of workers with their first jobs and initial on-the-job training. An estimated 53 percent of small businesses are home-based. Small business are more likely to employ younger and older workers, women, and many of whom prefer or are able to work only on a part-time basis. Small businesses typically remain in their communities, obeying labor, environmental, and other state and federal regulations.
Authorization vs. Appropriation AUTHORIZATION: In some countries, such as the United States, the term authorization is used to denote a general law setting up a program and permitting appropriation but not giving any specific authority to spend. In most countries, agencies and departments require specific executive authorization ( apportionment, allotment, or warrant ) to actually incur an obligation against appropriation. APPROPRIATION: refers to an authority under a law given by the legislature to the executive to spend public funds for a specified purpose. Annual appropriations are made through annual budget laws. Supplementary budgets/appropriations are sometimes granted subsequent to the annual law if the annual appropriation is insufficient to meet the purpose. Standing appropriation is sometimes used for authority extending beyond a single budget year under separate legislation (such as social security legislation).
Capital Access Organization Chart Capital Access Office of Credit Risk Management Office of Financial Assistance Office of International Trade Investment Division Office of Surety Bond Guarantees
Office of Financial Assistance Organization Chart Director Director of Lending Center Manager Technology National Customer Service Manager
OFA Organization Job Descriptions Lending Oversees policy and product development for 7a, 504 and Microlending Programs Operation Centers Responsible for loan origination and loan guarantee purchase activity on all standard SBA loans as well as servicing and liquidation for all disaster loans in addition to SBA business loans. Technology Oversees the technical support of all OCA activities and is the primary interface with OCIO National Customer Service Manager Coordinates service strategy for largest lenders and works with District Directors and Centers to improve the service interface between lenders and the SBA
Office of Credit Risk Management Office of Credit Risk Management Large Lender Oversight Small Lender Oversight Portfolio Analysis Team
Why are SBA Loan Programs necessary? In a perfect market for financial resources, all firms would be able to bid for the available funds on the basis of price, which reflects relative risks and other costs Interest rate ceilings imposed by state usury laws create an imperfection in financial markets Ceilings effectively prevent commercial banks from allocating credit to borrowers whose risks would dictate an interest rate above the ceiling, irrespective of the small borrower's willingness and ability to pay Reinforced by the higher administrative, investigative and servicing costs faced by banks in making loans to small firms (smaller loans but require the same processing) Loans for small business exporters have even less incentive because processing is more complicated and community banks generally do not have international departments (lack of expertise increases perceived risk to the bank)
How do SBA Loan Programs help remedy market imperfections? SBA s loan programs address disincentives to small business lending by reducing the relative credit risk to the bank through a Government guarantee for repayment of a significant portion of the loan As an added benefit, SBA loan programs help financial institutions to meet their obligations under the Community Reinvestment Act of 1977 Last fiscal year SBA made approximately 44,000* loan guarantees totaling $7.3 billion to help U.S. small businesses grow and prosper *does not include microloans or SBIC
Small Business Act (7a) Loan Programs Agency s flagship programs Available to all participant lenders (contract with SBA) Can be used for term loans up to $2 million* 85% of credit decisions made by lenders not SBA *Small Business Jobs Act 2010 raises the 7(a) loan limit to $5MM
7(a) Loans May be used to: Expand, renovate facilities; Buy machinery, equipment, fixtures, buildings and land for business; Finance receivables and augment working capital; Refinance existing debt (with compelling reason); Finance seasonal lines of credit; and/or Construct commercial buildings.
Maximum Size Standards Manufacturing 500-1,500 employees Wholesaling 100 employees for financial assistance programs Services $6 million to $21.5 million in annual receipts, Retailing $6 million to $21 million in annual receipts General and heavy construction $17 million to $27.5 million in annual receipts Special trade construction $12 million in annual receipts Agriculture From $750,000 to $9 million in annual receipts
Role in Meeting Loan Demand Most Viable Business Profile Experienced management Sterling credit Generous collateral Sound business idea Financial reserve Factors that determine this range: Overall economy Lenders regulatory environment Lenders liquidity Lenders competitive environment Least Viable Business Profile No management experience No potential chance of repayment Unfeasible business idea No financial reserves Lender Range SBA Range No Range Lenders are comfortable making loans without SBA s guaranty Loan credit or terms are outside of the lenders normal range. Loan will not be made without SBA s guaranty Lenders are not comfortable making loans even with SBA s guaranty
Dollars in thousands SBA Nationwide Loan Volume
Numbers in thousands SBA Nationwide Number of Loans
SBA Loan Terms Flexible maturities: Up to 10 years for working capital Up to 25 years for fixed assets: o Real estate o Construction o Equipment Interest rates: Negotiated between borrower and lender Typically cannot exceed prime rate plus 2.75%
Secondary Market For SBA Loan Guarantees SBA created a secondary market for SBA guaranteed loans by administrative action in 1972 with the informal objective of lowering the borrowing costs and increasing the flow of capital to the small business community Allows a lender to sell a loan it originates rather than holding the loan on its balance sheet and provides lenders a funding alternative to deposits, lines of credit, and other debt sources Investors are not subject to credit risk because the federal guarantees ensure that investors will be paid on defaulted loans
Social, Cultural, and Political Context for Small Business in the United States Culture of Individualism Work Ethic Spirit of Capitalism Business Failure NOT a Social Stigma Risk and Competition Admired and Rewarded Sherman Antitrust Act- enacted to prohibit conspiracies, contracts and combinations in restraint of trade, and to prohibit monopolization or contracts, combinations and agreements tending to monopolize Clayton Act of 1914- prohibits mergers, the effect of which "may be to substantially lessen competition or to tend to create a monopoly" Robinson-Patman Act of 1936- prohibits price discrimination between purchasers of goods of "like grade and quality"
SBIC International Success Stories American Online Apple Computer Intel Corp. Federal Express Callaway Golf Sun Microsystems