Partners Help Small Businesses
Wichmann, Jr., and Ken M. Boze
OCTOBER 2007 - The
Small Business Administration (SBA) granted a record dollar value
and number of loans during its 2006 fiscal year. The agency’s
two primary loan programs led the way: The SBA 7(a) loan guarantee
program, mostly used for working capital financing, produced 90,477
loans totaling $13.46 billion, while the 504 Certified Development
Company loan program, used for real estate and fixed-asset financing,
provided 9,720 loans totaling $5.61 billion. SBA Administrator
Steven C. Preston indicated that “Before FY [Fiscal Year]
2002, the programs never produced more than 42,000 loans combined.
Since then, loan volume has more than doubled” (Office of
Advocacy, U.S. Small Business Administration, “Small Businesses
Receive More Than 100,000 SBA-Backed Loans in FY 2006, a Sixth
Consecutive Record Year,” www.sba.gov/idc/groups/public/documents/sba_homepage/news
the SBA’s 50th anniversary, the Office of Advocacy was charged
with implementing the federal Regulatory Flexibility Act (RFA),
which required federal agencies to review proposed rules for their
effects on small businesses, and to mitigate undue regulatory
burdens. President Bush’s Executive Order 13272 required
the Office of Advocacy to train the regulatory agencies of the
entire federal government on their RFA obligations. The Office
of Advocacy reviewed proposed rules affecting small firms, resulting
in $6.3 billion in cost savings, with an estimated annual recurring
savings of $5.7 billion for small entities.
act as a driving force to energize the economy. Statistics from
the Office of Advocacy indicate that small businesses represent
99.7% of all employers and employ half of all private-sector employees
(“Small Business Drives the U.S. Economy,” 2006,
The more than 24 million small businesses generated 60% to 80%
of the net new jobs annually over the past decade, while creating
more than 50% of the nonfarm private gross domestic product (GDP).
Small businesses supplied more than 23% of the total value of
federal prime contracts, while accounting for $98 billion in both
prime contracts and subcontracts. Small businesses produced nearly
14 times more patents per employee than large businesses, and
those patents were twice as likely to be cited. Home-based businesses
make up 53% of small firms (see “What is a small business,”
In addition, small companies make up 97% of all identified exporters
and produce 26% of the known export value. Exhibit
1 presents a list of 10 reasons to love small businesses.
The SBA leverages
its employees as a catalyst to stimulate small business startups
and growth through cooperation of partners in the private and
public sectors. There are eight important SBA partners: Small
Business Development Centers (SBDC), SBA Lenders, Certified Development
Companies (CDC), Microlenders, Small Business Investment Companies
(SBIC), SCORE counselors, Women’s Business Centers (WBC),
and Veterans Business Outreach Centers (VBOC).
50 years have witnessed many SBA success stories. Accountants
should be aware of the SBA’s programs to help small businesses.
Many of these programs need accountants to be partners by providing
accounting and management advice to small businesses. These
small companies represent future business, because inadequate
accounting is often cited as a major problem area in small companies.
2 lists different ways that SBA partners help small businesses.
Business Development Centers
program is the SBA’s largest resource partner other than
financial institutions. The SBDC’s mission is to provide
management and technical assistance to current and prospective
owner-managers of small businesses. The SBDC consists of the government,
private sector, and academia working together to strengthen the
small business community. A college or university may be the focal
point of an SBDC program. SBDCs are designed to function in the
same manner as agricultural extension agents have for ranchers
and farmers. The SBDC provides the framework for bringing all
government, private sector, and academic programs together at
a low cost (or free) to all small business owner-managers. SBDC
assistance is tailored to the local community and individual needs.
The SBA provides 50% or less of operating funds for each state
SBDC, with one or more sponsors providing the rest of the matching
63 lead SBDCs provided a network of more than 1,100 service locations:
at least one in every state (Texas has four and California has
six), the District of Columbia, Guam, Puerto Rico, American Samoa,
and the U.S. Virgin Islands. Through SBDCs and in partnership
with the Association of Small Business Development Centers, the
SBA offers counseling, training, and technical assistance in all
aspects of business management. Assistance is available to anyone
starting or improving a small business who cannot afford a private
consultant. SBDCs are a one-stop management and technical assistance
program for individuals and small companies, offering a wide variety
of services, including the following:
business plans (SBDCs are the preeminent business plan writers).
confidential free counseling to small businesses.
in technology transfer, research, and development.
in finding export opportunities.
and maintaining a comprehensive library that contains current
information and statistical data.
a list of local and regional private consultants to whom small
businesses can be referred (SCORE).
information on regulatory requirements.
are commercial banks, credit unions, savings and loans, and other
lenders that provide small businesses with loans structured under
the guidelines established by section 7(a) of the original Small
Business Act in 1953. The SBA’s 7(a) programs [a variety
of SBA Guaranty 7(a) Loan Programs exist] are designed to maximize
the money for small businesses while minimizing taxpayer expense.
The SBA leverages nongovernment lenders; very few direct government
loans are made, except for disaster loans.
must meet the following criteria to participate:
- Be able
to continuously evaluate, process, close, disburse, service,
and liquidate loans.
- Be open
to the public to make loans.
- Be able
to demonstrate good character and maintain a solid reputation.
- Be supervised
and examined by a state or federal regulatory authority.
makes the loan, and the SBA guarantees it. The SBA guarantees
up to 85% on loans of $150,000 or less. Loans over $150,000 may
be guaranteed up to 75%, but cannot exceed $1.5 million in exposure.
The terms are seven to 10 years on working capital loans, but
up to 25 years on fixed-asset loans. Interest rates are fixed
and variable, tied to a certain percentage above the prime rate.
and feasibility criteria. SBA uses eligibility and
feasibility criteria to make a loan. Eligibility criteria have
to do with meeting size standards, being for-profit, lacking the
internal resources to provide financing, and being able to demonstrate
the ability to repay. Feasibility criteria have to do with the
five Cs of credit (capacity, capital, conditions, collateral,
and character), with the SBA and lenders following the same credit
guidelines. Repayment of the loan is the primary feasibility consideration,
while management ability, good character, owner’s equity,
and collateral are also important.
Lenders Program. The Certified Lenders Program (CLP)
was developed by the SBA to give special treatment to lenders
having a successful track record with the agency and an understanding
of its policies and procedures. If the CLP performs a complete
analysis, the SBA promises to process the loan quickly. The SBA
makes the final credit feasibility and eligibility decision, striving
for a three-day turnaround time when arriving at a loan decision.
The key to the CLP is the greater utilization of the credit knowledge
of the lender to shorten the SBA’s loan processing time.
Applications to be a CLP lender are approved and renewed by the
SBA district director. CLPs account for 7% of all SBA loan guarantees.
Lenders Program. The Preferred Lenders Program (PLP)
is another attempt by the SBA to streamline its financial assistance
to small businesses. The PLP gives preferred lenders the authority
to make loan approvals and closings, and do most servicing and
liquidations. PLP lenders, which are nominated by the agency,
must demonstrate abilities in processing and servicing SBA-guaranteed
loans. Applications to be a PLP lender are approved by the associate
administrator of financial assistance (AA/FA). Preferred loans
account for about 33% of SBA loans.
a Certified Development Company
The 504 Certified
Development Company (CDC) Program is one of the SBA’s oldest
and most successful business development organizations. CDCs provide
long-term, fixed-asset financing so small businesses can obtain
real estate, machinery, and equipment, and expand or modernize.
A CDC is a nonprofit corporation set up to contribute to the economic
development of its community. CDCs work with the SBA and private-sector
lenders to provide financing and management assistance to small
businesses. About 270 CDCs exist nationwide, each covering a specific
geographic area. A CDC must provide at least two 504 loans each
year, while its portfolio must demonstrate one job opportunity
per $50,000 of funding.
7(m) Loan Program provides short-term loans of up to $35,000 (averaging
about $13,000 each) to small businesses and not-for-profit childcare
centers for working capital or the purchase of inventory, supplies,
furniture, fixtures, machinery, or equipment. Loan proceeds may
not be used to retire existing debt or buy real estate. The SBA
makes funds available to nonprofit community-based lenders (intermediate
lenders) that make loans to eligible borrowers. The intermediate
lenders (IL) make the microloans and provide management and technical
assistance. The loans are not guaranteed by the SBA. The IL may
not borrow more than $750,000 from the SBA in its first year,
while the maximum obligation in later years is $3.5 million.
Business Investment Companies
Business Investment Company (SBIC) Program was started by the
SBA in 1958 to fill the gap between the availability of venture
capital and the needs of small businesses in start-up and growth
situations. In 2005, the SBA had over $6.3 billion invested in
418 funds, $5.1 billion in commitments, and private capital of
$12 billion, resulting in total capital resources of $23.4 billion.
No tax dollars fund SBIC debentures; they are pooled each year
and sold in public markets to private investors in the form of
SBA Guaranteed Certificates.
SBA-licensed venture capital companies designed to provide equity
and debt-financing to small firms. SBICs buy stock or debt securities
of small firms and they make long-term loans of no more than 20
years. All SBICs are for-profit businesses.
Corps of Retired Executives (SCORE) is a highly successful SBA
counseling program. SCORE is a resource partner with the SBA and
one of the best sources of free and confidential small business
advice, helping owner-managers from an idea to start-up to success.
SCORE is a nonprofit organization for entrepreneurial education
and assistance, encouraging the formation, growth, and success
of small businesses nationwide. Over the years, SCORE has provided
more than 7.5 million small business owner-managers with practical,
real-world advice for starting and managing a small business.
Today, SCORE provides more than 400,000 counseling and training
sessions each year, including more than 100,000 counseling sessions
conducted by e-mail.
the 374 SCORE chapters in over 800 locations nationwide comprised
approximately 10,500 retired and working volunteer counselors
experienced as entrepreneurs and corporate managers. SCORE volunteers
come from the ranks of businesspeople and professionals, including
former retailers, wholesalers, plant managers, accountants, lawyers,
bankers, and educators. The SCORE counselors provide free business
advice and counseling as a public service:
SCORE” e-mail advice online.
workshops at chapter offices.
articles and business templates.
Business Center constitutes a national network of nearly 100 educational
centers to help women start and improve small firms. The WBC’s
mission is to level the playing field for women entrepreneurs,
giving them the opportunity to overcome the unique obstacles they
face in the business world. According to the SBA, there are 9.1
million women-owned businesses employing 27.5 million people and
contributing $3.6 trillion to the economy.
Office of Women’s Business Ownership (OWBO) and the Online
Women’s Business Center are key institutions. OWBO promotes
the growth of women-owned small businesses by counseling, teaching,
encouraging, and inspiring women-owned small businesses.
and technical programs.
to credit and capital.
to federal contracts.
to international trade opportunities.
network of WBCs in nearly every state.
Business Outreach Centers
Business Outreach Program (VBOP) provides entrepreneurial development
services, such as business education, counseling, mentoring, and
referrals to eligible veterans owning or considering starting
a small business. The SBA has five organizations participating
with the VBOP, including the SBDC, SCORE, the WBC, the Business
Information Centers (BIC), and the Tribal Business Information
Centers. As of August 2006, the VBO centers trained 4,932 veterans
and counseled 3,458 of them. The following are services provided
by Veterans Business Outreach Centers:
plan workshops dealing with self-employment.
assessment (determining abilities and requirements).
plan preparations (developing and maintaining a five-year business
feasibility analysis (strategic planning portion of the business
plan, looking at strengths and weaknesses).
training and counseling.
(onsite visits to ensure adherence to the business plan).
about federal contracting opportunities for service-disabled
services (e.g., providing information in areas such as international
trade, franchising, internet marketing, and accounting).
business owner-managers may dread the idea of drafting a formal
business plan—outlining accounting, marketing, and planning
strategies in great detail. After the authors interviewed small
business owner-managers and prospective entrepreneurs in Alaska,
Colorado, Illinois, Minnesota, Montana, Wisconsin, and Wyoming,
they found that many did not complete a business plan. In recent
years, however, the SBA and SBA lenders have been asking for business
plans with varying levels of detail, depending upon the banker
or loan officer.
start-ups neither want to make a business plan nor can afford
to pay an accountant to do so. Accountants should refer clients
to an SBDC for help preparing a business plan. A CPA firm creates
credibility, and avoids wasting time if the new venture does not
plans should not be an obstacle in starting or improving a business.
Business plans have several advantages, such as:
entrepreneurs to consider assumptions related to the business
entrepreneurs to decide whether to start a business.
entrepreneurs and their accountants decide how much financing
small business managers think through goals and strategies.
income statements, balance sheets, cash forecasts, and break-even
analysis, all elements of a good accounting system.
strengths and weaknesses.
the customer base for sales.
plans have a few disadvantages, of course: They are time-consuming
to prepare, especially if great detail is required. They may be
costly to prepare if an entrepreneur lacks accounting knowledge.
And they may be an obstacle to an entrepreneur starting or improving
a small business. SBA partners, especially SBDCs, however, can
help entrepreneurs prepare business plans. CPAs should not consider
the SBDC as a competitor, because owner-managers of small businesses
often do not have the money to spend on comprehensive business
plans that may reveal a less-than-viable opportunity. The prospective
borrower should look for a banker that is easy to work with while
realizing the banker and the SBA want to make good loans, backed
up with documentation in the form of a business plan.
here to view Sidebar.
Wichmann, Jr., PhD, CPA, is a professor of accounting in
the school of management at the University of Alaska– Fairbanks;
Ken M. Boze, CPA, CMA, CFM, is a professor of accountancy
and the chairperson of the accounting department at the University
of Alaska– Anchorage.