SMALL BUSINESS ADMINISTRATION SURETY BOND GUARANTEE FUND

STATEMENT OF NEED AND PURPOSE

This proposed legislation will provide the required increase in the capital authorized for the Surety Bond Guarantee Fund to finance the 1977 and 1978 levels projected at the 1977 level of $942 million. The increase requested is based on the $36 million appropriated in 1977 and $19 million estimated in 1978.

The increase in authorization from $56.5 million to $88 million was projected as follows: Dollars in millions

[The prepared statement of Mr. Kobelinski follows:]

Appropriations in excess of authorization..
Estimated requirements for 1978-

Total requirement--

Current authorization..

Requested increase_.

STATEMENT TO THE SENATE COMMITTEE ON SMALL BUSINESS

BY

Mitchell P. Kobelinski, Administrator

Small Business Administration

January 7, 1977

I am glad to offer the Committee these observations based on about a year's experience as Administrator of the Small Business Administration.

The conditions I have found in the economic sector served by this agency are alarming. SBA is a small agency with limited resources faced with an immense responsibility. Over the years Congress and the Executive Branch have added many programs to our list, all with good purposes. However, the situation we now face is that the demands the programs are making on our resources are getting in the way of the rescue job this agency must do. We need a re-orienting of our priorities.

Approximately 400,000 small businesses fail each year. Of the 500,000 new ownerships that crop up each year, half do not last more than two years and 90 percent go broke within five years. Statistical studies indicate that management deficiency is the

underlying cause of 9 out of 10 of the failures. Yet SBA is far more

occupied with loan programs than with improving small business

management.

Almost all the new people we have been able to add to

the agency in the past three years have been put to work on the loan

portfolio, thereby working to salvage past decisions rather than

solving current problems.

The emphasis should be on converting small business from a game of chance to a game of skill.

Instead of using the bulk of

its resources to provide loans for high risk operations, the government should be doing more to help the small businessman learn

HOW TO SUCCEED. Yet last fiscal year SBA approved more than $1.9 billion in direct loans and loan guarantees, miring itself still more deeply in the massive burden of portfolio management, while highly promising management assistance programs went begging for higher priorities.

This means we are losing vast opportunities for personal successes and national economic revival that better small business management could provide.

While job creation is not the prime mission of SBA, we believe that the management assistance method will be far more productive than the so-called "Job Bills." Small Business' number one concern is inflation. Job bills add to Federal outlays and create inflationarycausing deficits. SBA's management assistance program has no

inflationary impact at all.

The almost 10 million small businesses account for 48 percent of the nation's gross business product and employ 58 percent of the

business labor force. This vast constituency will be ill served if we are forced by program imperatives to neglect the many to serve

the few.

A wiser course of action would mean hundreds of thousands of jobs saved each year, increased productivity from better managed businesses, and a more balanced and stronger national economy, with reduced inflation and greater advantages in foreign trade.

We should begin with a hard look at SBA's loan and loan guarantee

programs.

Only 26,000 small business loans were made last fiscal year, and it was a relatively busy year for the loan programs. A preliminary study indicates that approximately 30 percent of loans made are actually to borrowers who already had SBA loans, so that the number of new SBA clients given SBA loan assistance was less than 20,000 one out of 500 of those in existence. While they are helpful in individual cases,

any favorable impact they have on the economy is infinitesimal. A substantial number of those who got the financing support probably could have found some ways to satisfy their needs without help.

The vast majority of all small businesses do not need our standard 90 percent guarantee in order to obtain loans from commercial banks. If they are creditworthy, the money is there for them. If they are not,

then probably a loan is not the proper remedy.

There has been a drastic change in commercial banking deportment since 1953, when SBA was founded. At that time government loan support for small business was essential. Bankers were suspicious of borrowers who were not already well established; they were chicken-hearted about taking risks, and were only passively involved in local economic development programs. A small downtown bank in Chicago where I started my banking career in 1951 quickly became a pariah in the financial community after it started advertising for business. Needless to say, the prevailing attitude then about loans to small companies was that they should be dispensed at a charity window, if anywhere.

Now there is competition among commercial lenders and a small businessman with favorable prospects can walk in and rap for attention at the loan officer's desk where he once was almost expected to kneel.

Furthermore, his credit worthiness improves as his management skills increase, making this a case where a lower priority program reduces the need for a top priority program.

Then there is the transgression of economic principle that is implicit in government subsidies of business. Competitiveness is the measure of an enterprises's worth. A company which gets government financial help is not competing fairly against others in its field which arrange their own financing. This kind of an intrusion on free enterprise has serious implications.