II.

Origins of the Small

Business Administration

There are 13,286,000 profit-making enterprises in the United States which the Federal Government (SBA) officially classified in 1973 as being small businesses.1 More than forty million people earn their living from those concerns, and their output represents 43 percent of the Gross National Product. If the farming enterprises recently made eligible for SBA assistance are included, the total share of the GNP increases.

The astonishing growth of small business enterprises in recent years is dramatically depicted by the fact that in 1966, only ten years ago, SBA estimated there were far less than half the current number - 5,200,000 firms classified as small. Small businesses engage in almost every conceivable venture in the economy and provide the only avenue for entrepreneurs who want to be owners rather than employees.

It is somewhat surprising to note that, prior to World War II, the Federal Government's interest in the specific problems of small concerns was not represented in any one agency of the Government. The Reconstruction Finance Corporation (RFC), created in the Thirties, did provide some capital assistance, and there were fragmented programs in other agencies, but there was no central authority.

During World War II, the Smaller War Plants Corporation was established to help small firms, mainly to help them compete for war orders with special priorities and considerations to increase American production. The agency was abolished in 1945. A year later, the Department of Commerce set up an Office of Small Business, which began assisting small concerns by providing specialized information, management training, and some effort to guide small firms to Federal markets; but the total effort was small compared to the very large audience it addressed.

In 1951, partly because of the Korean War, the Small Defense Plants Administration (SDPA) came into being. It was the first Government entity designed to look at the growing number of special problems small firms were beginning to face new technologies, new management concepts, increasing tax complications, and a need for keener competition. There was also a recognition that

buyers in the
the Federal procurement establishment
frequently were suspicious when determining if a little
company could actually do the required job for the
Government. Accordingly, the SPDA had among its
responsibilities the certification of small firms to handle
particular orders.

When the Reconstruction Finance Corporation - the principal capital source for small firms was abolished in 1953, Congress recognized that the time had come to put the majority of Federal efforts to help small companies under one roof financial aid, management assistance, technical advice, procurement assistance and collateral functions, as well as a specific program to attract and educate potential entrepreneurs to bring them into the ownership world.

Accordingly, in the summer of that year, both Houses of
Congress, through their respective committees on
Banking and Currency, held extensive hearings2 on ways
to put together the small business aspects of RFC, those of
the expired Smaller War Plants Corporation, and the func-
tions which the Commerce Department had undertaken in
this field. On July 30, 1953, the President signed the act
that created the U.S. Small Business Administration.^
At first, it was a temporary agency with very limited
resources for financial assistance. For five years it
appeared annually before Congress to report its activities
and request a renewed lease on life. Circumstances and
performance led Congress in 1958 to take two actions: It
made the agency permanents, and it enacted the Small
Business Investment Act of 1958,6 which added a signifi-
cant authority to SBA. It empowered the agency to "go
into partnership" with private investment companies,
putting up double the monies the private investors
forwarded for funds to help new ventures get started and

'U.S. Small Business Administration, 1976 Annual Report, Government Printing Office, Vol. I, p. 14.

2U.S. House of Representatives, Committee on Banking and Currency, Creation of SBA. H.R. 5141, 83d Congress, 1st Sess., Government Printing Office.

3For a definitive history of the forerunner agencies to SBA and of its activities before it became a permanent agency, see Small Business Administration by Addison Parris, Praeger Library of Government Departments and Agencies, 1968.

to rescue those in distress for lack of operating cash. This action significantly broadened the Federal effort to reach a larger portion of the existing and potential small business community.

Scope of the SBA

Today, twenty-four years after its creation, SBA is still a small agency in terms of number of employees, but it has a loan portfolio in the billions, a broad network of offices, and very wide mandates from Congress to assist almost anyone who wants to go into business and to help 97 percent of businesses.

Since its inception, SBA made 450,000 loans to businesses and startup entrepreneurs totalling $18.5 billion. More than half this total was to on-going firms. The balance went to those starting, those who are considered economically or socially disadvantaged, and those covered by the various SBA lending programs. Another half million loans, totalling $3.6 billion, were made as a result of physical disasters to homes, to businesses, and to farmers. This aid to farmers is in addition to the relief and assistance available to them from the Farmers Home Administration.

From the 83d through the most recent Congress, each has amended, revised, expanded, and added to SBA authorities and duties. In April 1970 the agency's Office of General Counsel issued a "Legislation Handbook" to help its own staff keep track of the myriad laws under which SBA operates. The printed text runs 150 pages, and in the ensuing five years, there have been 15 change additions which are as long as the original handbook, containing later legislation as well as updating the list of applicable executive orders issued over the years.

Out of all this law, three paragraphs from the Small Business Act of 1953 succinctly tell the average citizen what the agency is for:

SEC. 2.(a)... It is the declared policy of the Con-
gress that the Government should aid, counsel,
assist, and protect, insofar as is possible, the inter-
ests of small-business concerns in order to preserve
free competitive enterprise, to insure that a fair pro-
portion of the total purchases and contracts for and
services for the Government... be placed with small
businesses. . . .

7

8

(b)... The assistance programs are to be utilized to assist in the establishment, preservation and strengthening of small business concerns and improve the managerial skills employed in such enterprises, with special attention to small business concerns (1) located in urban or rural areas with high proportions of unemployed or low-income individuals; or (2) owned by low-income individuals; and to mobilize for these objectives private as well as public managerial skills and resources....

(c)... it is the declared policy of the Congress that the Government should aid and assist victims of floods and other catastrophes, and smallbusiness concerns which are displaced as a result of federally aided construction programs. . . .

Organization of the SBA

SBA is headed by an Administrator who reports directly to the President. There is a Washington headquarters, which does not make loans but supervises and directs a network of 84 field offices throughout all 50 States, Puerto Rico, the Virgin Islands, and Guam. The agency is small in staff, relative to other Federal establishments. There are approximately 4,300 employees, generally divided into three professional groups and a support and clerical staff.

The bulk of the professionals are loan officers, engaged in interviewing applicants, reviewing submitted applications, making credit judgments and, finally, recommending or disapproving loans. An allied group services loans which have been made, that is, remains in contact with the borrower as necessary and handles matters in connection with loans that are defaulted.

Another group of professionals are management assistance officers, whose duties involve rendering advice both to borrowers and any other applicant in the mechanics of operating their businesses. Poor management practices, poor recordkeeping, poor advertising, etc., are generally believed to be the greatest weaknesses of failing small concerns. SBA's management assistance officers try to render such assistance in three ways:

By direct intervention themselves.

professional management

By assigning a professional

counselor under contract to SBA for such work.