In response to recent arguments that the SBA should be abolished, Charles H. Green for the small business finance newsletter Coleman Report answered, "Of course not, silly goose."
There was some pretty inflammatory rhetoric Ray Hennessey published this week on Entrepreneur.com. He suggests, “It’s high time to eliminate the SBA altogether.”
I agree with some of the assertions makes (there are problems at the SBA); I don’t agree with his conclusions. “The SBA’s loan programs are designed to fund businesses that can’t find funding elsewhere,” he writes, while suggesting private equity and venture firms raise billions of dollars to fund the good ideas.
I’m not sure what Mr. Hennessey is smoking, but only a very small percentage of small businesses in the U.S. are likely to have a scalable enough model to gain the interest of a private investor or venture firm. It seems naïve to suggest that a new dry cleaner or hardware store would have any luck at convincing a venture firm to invest in their Main Street business. Equity investors are looking for companies that can scale quickly and return large profits with the influx of some extra cash.
The SBA, banks and other small business-focused lenders fill an important financing niche to the very businesses you and I consider small businesses.
Is he suggesting that any business that isn’t interesting to a private equity investor or venture firm is a bad business?
In fairness to Mr. Hennessey, he’s spent his career writing about Wall Street and the IPOs (initial public offerings) of the sexiest of the sexy startups. His resume doesn’t say much about spending time working in the Main Street businesses that provide 70 percent of the jobs in our country and are those the equity markets aren’t really interested in.
Green calls Mr. Hennessey an “ideological bully.” I tend to agree.
Mr. Hennessey does point out that lumping sexy tech startups, Main Street businesses and larger small businesses into the same category just doesn’t make sense. Nevertheless, labeling the company that presses my shirts as unworthy of credit because a venture firm is likely uninterested in funding their company is kind of shortsighted — can we even say ridiculous? Remember, 70 percent of jobs in the U.S. are in the very businesses Mr. Hennessey seems to disdain.
The SBA does have some problems, but guaranteeing (it’s local banks that really do the lending) too much capital to Main Street doesn’t happen to be one of them. The smallest small businesses are still struggling for capital as banks remain anxious about lending to them. Does that imply they are bad companies or their ideas are bad ideas? Heavens no. It does suggest that the way we approach lending to Main Street needs to be re-evaluated to better serve that segment of the small business borrower market.
Mr. Hennessey suggests the SBA has a horrible track record and funds risky ventures. He must have missed Deborah Gage’s piece in the Wall Street Journal a little less than a year ago. “[T]here is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites,” she says. “About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.”
Although venture capitalists like to laud their success rates, “The National Venture Capital Association estimates that 25 percent to 30 percent of venture-backed businesses fail,” she writes.
What’s more, the likelihood the average small business would be interesting to an equity investor is only around 2 percent. They just don’t have the potential to scale big enough to make investors the rate of return they need to tie up their money.
If there’s a problem with small business lending, it’s the definition of what we call small businesses. Unlike Mr. Hennessey, I’ve spent my entire career working in small business. I’ve worked in a Main Street business with fewer than five employees, along with a software company with almost $30 million in revenues and more than 250 employees, and the venture-backed startup I work at now. They are all categorized as “small businesses” but have very different capitalization needs.
I’m not sure I understand how Mr. Hennessey can suggest that banks aren’t facing risks and are making bad decisions with money backed by the SBA when the success rate of venture capitalists and other equity investors isn’t much to sing and dance about. Some startups fail. There’s not much we can do about that, regardless of how much research we’ve done into their potential viability. I’m not convinced it’s irresponsible bankers foisting bad loans onto the SBA. I think it’s just a part of the same small business environment that causes 35 percent of venture-backed businesses to fail, too.
Where Mr. Hennessey completely loses me is when he suggests, “It’s not as important as you think.” He argues, “In short, large businesses, in industries that matter most, get only a negligible amount of funding from SBA-backed loans. That means shutting down the program would have a negligible effect on lending. Why keep a government agency in place if most of the market wouldn’t notice it is gone?”
Main Street is what keeps communities alive, where most (70 percent) of U.S. jobs exist, and where two out of every three new jobs is created. I think that’s every bit as important as I think it is.
If anything, I think the SBA should be encouraging the banks within its system to step up and make more loans to small business owners by streamlining the process for loans of less than $50,000, for starters. Big businesses in major industries don’t need the SBA, that’s true. It’s the businesses you and I rely on to fix our cars, provide child care to our children and do my dry cleaning.
Mr. Hennessey suggests, “Perhaps there was a time when the SBA served a purpose for business. With abundant capital, better private-sector options and more worthy budget priorities for the government, now is no longer that time.”
I couldn't disagree more with Mr. Hennessey's assertions that we should abolish the SBA. And, with an audience that likely has an SBA loan or two, I can't help but wonder if his audience feels the same way.
As a Main Street business evangelist and marketing veteran with more than 25 years in the trenches, Ty Kiisel writes about leading people and small-business issues for lendio.com.