By Elizabeth Olson
Since the beginning of the 1990's, thousands of aspiring entrepreneurs have moved away from unemployment or welfare by borrowing a few thousand dollars -- even as little as $500 -- to set up their own small business.
Diane Holloway, a single mother and out-of-work pastry chef, used a $5,000 loan from a local women's economic agency in Silver City, N.M., several years ago to cobble together a restaurant in an old storefront, cooking for customers with a scavenged pizza oven and serving them on a half-dozen mismatched tables.
''That money made the difference,'' said Mrs. Holloway, whose restaurant, Diane's, is now thriving, with 30 employees. She plans to open two more restaurants next year. ''Without it, I wouldn't have had a chance to get my business going.''
Now the modest financial backing that Mrs. Holloway and other women and minorities have used to create jobs for themselves and others may soon be shut off. The Bush administration has proposed ending the funding for the Small Business Administration's microloan program, which provides seed money and technical assistance to start-ups and low-income entrepreneurs.
Small-business owners like Mrs. Holloway were wooed in the recent election by both parties, which hailed them as driving the American economy by creating millions of jobs across the country. But now that budget time is here, a political debate is boiling over administration proposals to scale back small-business programs.
Two of the S.B.A.'s signature loan programs are in trouble, according to some members of Congress who support them.
One, the microloan program, is targeted for elimination. It lent almost $33 million to 2,400 entrepreneurs in fiscal 2004, and is one of 10 agency programs set for termination in the budget proposed by President Bush for 2006. Supporters argue that a microloan is almost always the essential first step to success for women and minorities, who usually do not have the money, credit history or collateral to borrow from a commercial bank.
The other, the S.B.A.'s giant 7 (a) guaranteed loan program, is in turmoil. While it is not expected to be cut back, it has been operating on fees generated by its loans after running out of money in 2004. Supporters fear it may eventually be slated for elimination, following the pattern of another loan program, intended to help high-technology companies, that the administration now proposes ending.
The guaranteed loan program backed $12.7 billion in loans in fiscal 2004 to nearly 75,000 businesses.
Defenders of the administration's proposed cutbacks, including the agency's administrator, Hector V. Barreto, say that, in reality, money for small businesses will be little affected, and the government will save by not having to pay for the technical assistance that the law requires for loan recipients.
There is little chance that Congress, which has resisted previous administration efforts to prune the agency's budget heavily, will approve the proposed Bush administration cutbacks wholesale. Some influential Republicans are opposed, including Senator Olympia J. Snowe of Maine, the chairwoman of the Committee on Small Business and Entrepreneurship. Still, advocates of the program say the proposals are a serious threat to a program that has an exemplary record of success.
Women have received the greatest share of microloans, where the S.B.A. furnishes seed capital for lending by intermediaries, usually local nonprofit groups. According to Congressional data for fiscal 2004, more than 60 percent of such loans went to women, and the program had a default rate of just over 1 percent. The government also spent $15 million on technical assistance.
Teri Wade, who used a $5,000 microloan to open a salon in Herndon, Va., offering cellulite-reduction treatments, said that the hands-on assistance she received was crucial to her start-up.
''I would have made major mistakes,'' she said, ''like not getting liability insurance, or giving away too much of my business to get financing. Without that advice, I wouldn't be in business.''
The S.B.A. maintains that microloans, which average $13,600, can be folded into its guaranteed loan program, where the average loan is $15,300. The agency said that around one-third of guaranteed loans were under $35,000, indicating that they were borrowings by start-up firms.
The members of Congress said that recent changes in the way the guaranteed loan program was run, especially higher fees for borrowers and lenders, have already crimped the ability of small businesses to get loans. Moreover, they say, the fees and paperwork make smaller loans uneconomical for many banks.
Last October, the S.B.A.'s guaranteed loan program was shifted to fee-only, meaning the program receives its support from fees charged to borrowers and banks, and does not have yearly Congressional appropriations to make up any financial shortfall. As a result, the fees have risen, to as much as double on some loans.
''The borrower's costs are now double for the smaller loans of up to $150,000,'' said Richard Proudfit, chief executive of the Gateway Business Bank, a small bank in Cerritos, Calif., that lends to small businesses.
Mr. Barreto, the S.B.A. administrator, said higher fees had not curbed credit, citing statistics that S.B.A.-backed lending rose 11 percent in the last quarter of 2004 from a year earlier, to $4.4 billion.
But Representative Nydia Velazquez of New York, the senior Democrat on the House Small Business Committee, argued that higher fees were pushing lenders out of the picture. For example, she said that in 2001, more than 5,000 banks made S.B.A.-backed loans; three years later, only half as many banks did so. And she contested Mr. Barreto's claim of increased S.B.A. lending, saying that the agency's lending declined by about 10 percent in the last quarter of 2004, to $3.56 billion.
The members of Congress say that confidence in the agency's guaranteed loan program has been undermined, citing the disruption caused when the program ran out of money in early 2004 and was shut down for two weeks until an emergency appropriation was made. Then last April, the maximum amount of money businesses could borrow was lowered temporarily to $750,000, from $1.5 million.
That was damaging to some ventures. Marilyn Landis, a consultant for small businesses, said that lack of funding sank the effort of an established Pittsburgh trucking company to expand by buying a 40-truck fleet from a retiring owner.
The prospective buyer could not meet the $1.5 million asking price and the owner, who was in her 80's, did not want to carry a second loan. ''In the end, she sold the entire fleet of dump trucks and laid off all 30 employees,'' said Ms. Landis, of Basic Business Concepts in Pittsburgh. ''No one would finance this without S.B.A. backing.''
For a new business, it can be difficult to obtain even an S.B.A.-backed loan, small-business owners and bankers agree.
''It's fine and dandy,'' said Ms. Wade, the Virginia salon owner, ''to be talking about 7(a) loans, but those are not for start-ups, they are for established businesses.''
In New Mexico, Mrs. Holloway noted that it was not until she had been in business for 18 months that she was able to get a $30,000 S.B.A.-backed loan for her restaurant.
Only a tiny percentage -- 5.7 percent -- of guaranteed loans go to rural small businesses, which is one reason Senator Snowe opposes terminating the microloan program. Fully 40 percent of microloans currently go to micro enterprises in rural areas, so her constituents in Maine would suffer if the program were shut down.
She has also criticized a proposed $85 million reduction, to $593 million, in the S.B.A.'s overall budget for fiscal 2006. Among the cutbacks she is fighting is the proposed termination of the agency's Small Business Investment Company participating securities program, which encourages venture capitalists to invest in high-technology companies.
Her counterpart in the House, Representative Donald A. Manzullo of Illinois, a Republican who leads the Small Business Committee, also has resisted administration plans to terminate the decade-old program, which, in fiscal 2004, backed more than 2,100 equity investments in small businesses by venture capitalists, totaling more than $1.4 billion.
Rich Carter, a spokesman for the House committee, said, ''This program has had some hard times, but we feel we can salvage it to help small manufacturers.''
Ms. Velazquez said that minority-owned ventures would be hurt most because they received, in 2004, only 11 percent of the investment company money, totaling $148 million.
Still, she predicted that the proposed cutbacks would not win approval easily in Congress, ''because no one wants to be on the record as opposing small business.''
Since the beginning of the 1990's, thousands of aspiring entrepreneurs have moved away from unemployment or welfare by borrowing a few thousand dollars -- even as little as $500 -- to set up their own small business.
Diane Holloway, a single mother and out-of-work pastry chef, used a $5,000 loan from a local women's economic agency in Silver City, N.M., several years ago to cobble together a restaurant in an old storefront, cooking for customers with a scavenged pizza oven and serving them on a half-dozen mismatched tables.
''That money made the difference,'' said Mrs. Holloway, whose restaurant, Diane's, is now thriving, with 30 employees. She plans to open two more restaurants next year. ''Without it, I wouldn't have had a chance to get my business going.''
Now the modest financial backing that Mrs. Holloway and other women and minorities have used to create jobs for themselves and others may soon be shut off. The Bush administration has proposed ending the funding for the Small Business Administration's microloan program, which provides seed money and technical assistance to start-ups and low-income entrepreneurs.
Small-business owners like Mrs. Holloway were wooed in the recent election by both parties, which hailed them as driving the American economy by creating millions of jobs across the country. But now that budget time is here, a political debate is boiling over administration proposals to scale back small-business programs.
Two of the S.B.A.'s signature loan programs are in trouble, according to some members of Congress who support them.
One, the microloan program, is targeted for elimination. It lent almost $33 million to 2,400 entrepreneurs in fiscal 2004, and is one of 10 agency programs set for termination in the budget proposed by President Bush for 2006. Supporters argue that a microloan is almost always the essential first step to success for women and minorities, who usually do not have the money, credit history or collateral to borrow from a commercial bank.
The other, the S.B.A.'s giant 7 (a) guaranteed loan program, is in turmoil. While it is not expected to be cut back, it has been operating on fees generated by its loans after running out of money in 2004. Supporters fear it may eventually be slated for elimination, following the pattern of another loan program, intended to help high-technology companies, that the administration now proposes ending.
The guaranteed loan program backed $12.7 billion in loans in fiscal 2004 to nearly 75,000 businesses.
Defenders of the administration's proposed cutbacks, including the agency's administrator, Hector V. Barreto, say that, in reality, money for small businesses will be little affected, and the government will save by not having to pay for the technical assistance that the law requires for loan recipients.
There is little chance that Congress, which has resisted previous administration efforts to prune the agency's budget heavily, will approve the proposed Bush administration cutbacks wholesale. Some influential Republicans are opposed, including Senator Olympia J. Snowe of Maine, the chairwoman of the Committee on Small Business and Entrepreneurship. Still, advocates of the program say the proposals are a serious threat to a program that has an exemplary record of success.
Women have received the greatest share of microloans, where the S.B.A. furnishes seed capital for lending by intermediaries, usually local nonprofit groups. According to Congressional data for fiscal 2004, more than 60 percent of such loans went to women, and the program had a default rate of just over 1 percent. The government also spent $15 million on technical assistance.
Teri Wade, who used a $5,000 microloan to open a salon in Herndon, Va., offering cellulite-reduction treatments, said that the hands-on assistance she received was crucial to her start-up.
''I would have made major mistakes,'' she said, ''like not getting liability insurance, or giving away too much of my business to get financing. Without that advice, I wouldn't be in business.''
The S.B.A. maintains that microloans, which average $13,600, can be folded into its guaranteed loan program, where the average loan is $15,300. The agency said that around one-third of guaranteed loans were under $35,000, indicating that they were borrowings by start-up firms.
The members of Congress said that recent changes in the way the guaranteed loan program was run, especially higher fees for borrowers and lenders, have already crimped the ability of small businesses to get loans. Moreover, they say, the fees and paperwork make smaller loans uneconomical for many banks.
Last October, the S.B.A.'s guaranteed loan program was shifted to fee-only, meaning the program receives its support from fees charged to borrowers and banks, and does not have yearly Congressional appropriations to make up any financial shortfall. As a result, the fees have risen, to as much as double on some loans.
''The borrower's costs are now double for the smaller loans of up to $150,000,'' said Richard Proudfit, chief executive of the Gateway Business Bank, a small bank in Cerritos, Calif., that lends to small businesses.
Mr. Barreto, the S.B.A. administrator, said higher fees had not curbed credit, citing statistics that S.B.A.-backed lending rose 11 percent in the last quarter of 2004 from a year earlier, to $4.4 billion.
But Representative Nydia Velazquez of New York, the senior Democrat on the House Small Business Committee, argued that higher fees were pushing lenders out of the picture. For example, she said that in 2001, more than 5,000 banks made S.B.A.-backed loans; three years later, only half as many banks did so. And she contested Mr. Barreto's claim of increased S.B.A. lending, saying that the agency's lending declined by about 10 percent in the last quarter of 2004, to $3.56 billion.
The members of Congress say that confidence in the agency's guaranteed loan program has been undermined, citing the disruption caused when the program ran out of money in early 2004 and was shut down for two weeks until an emergency appropriation was made. Then last April, the maximum amount of money businesses could borrow was lowered temporarily to $750,000, from $1.5 million.
That was damaging to some ventures. Marilyn Landis, a consultant for small businesses, said that lack of funding sank the effort of an established Pittsburgh trucking company to expand by buying a 40-truck fleet from a retiring owner.
The prospective buyer could not meet the $1.5 million asking price and the owner, who was in her 80's, did not want to carry a second loan. ''In the end, she sold the entire fleet of dump trucks and laid off all 30 employees,'' said Ms. Landis, of Basic Business Concepts in Pittsburgh. ''No one would finance this without S.B.A. backing.''
For a new business, it can be difficult to obtain even an S.B.A.-backed loan, small-business owners and bankers agree.
''It's fine and dandy,'' said Ms. Wade, the Virginia salon owner, ''to be talking about 7(a) loans, but those are not for start-ups, they are for established businesses.''
In New Mexico, Mrs. Holloway noted that it was not until she had been in business for 18 months that she was able to get a $30,000 S.B.A.-backed loan for her restaurant.
Only a tiny percentage -- 5.7 percent -- of guaranteed loans go to rural small businesses, which is one reason Senator Snowe opposes terminating the microloan program. Fully 40 percent of microloans currently go to micro enterprises in rural areas, so her constituents in Maine would suffer if the program were shut down.
She has also criticized a proposed $85 million reduction, to $593 million, in the S.B.A.'s overall budget for fiscal 2006. Among the cutbacks she is fighting is the proposed termination of the agency's Small Business Investment Company participating securities program, which encourages venture capitalists to invest in high-technology companies.
Her counterpart in the House, Representative Donald A. Manzullo of Illinois, a Republican who leads the Small Business Committee, also has resisted administration plans to terminate the decade-old program, which, in fiscal 2004, backed more than 2,100 equity investments in small businesses by venture capitalists, totaling more than $1.4 billion.
Rich Carter, a spokesman for the House committee, said, ''This program has had some hard times, but we feel we can salvage it to help small manufacturers.''
Ms. Velazquez said that minority-owned ventures would be hurt most because they received, in 2004, only 11 percent of the investment company money, totaling $148 million.
Still, she predicted that the proposed cutbacks would not win approval easily in Congress, ''because no one wants to be on the record as opposing small business.''
