COVID-19 reignites criticism of SBA loans
COVID-19 reignites criticism of SBA loans
Created by an act of Congress in 1953, the U.S. Small Business Administration (SBA) is a government agency that serves to promote and protect the interest of entrepreneurs, sole proprietors and other small businesses.
The SBA acts as a source of government contracts and provides mentoring, business advice and training. Perhaps its most crucial function is to provide capital and loans that are critical to the growth and development of the small business community. Smaller businesses often lack the resources to obtain financing from banks or investors that larger companies traditionally use. SBA loans are a valuable source of funding for small business cash needs.
In 2019, the SBA approved more than 63,500 small business loans totaling $28.2 billion. More recently, on March 27, the $2.2 trillion CARES Act was passed by Congress and signed by President Trump to address the economic fallout from the COVID-19 virus. Included in this stimulus package was the Paycheck Protection Program (PPP), which authorized $349 billion in forgivable loans to small businesses if all employees were kept on payroll for eight weeks. Administered by the SBA, the program requires that 75% of the money be used on payroll, with the rest available to cover rent, mortgage interest or utilities.
Unfortunately, just two weeks later, the $349 billion was exhausted, leaving many small business owners on the sideline. On April 24, an additional $310 billion was added to the PPP fund. But even this has done little to quell the complaints of the SBA’s handling of loan disbursements. Many small business owners still feel they will miss out on receiving loans.
The frustration lies with the SBA’s methodology in defining what actually constitutes a small business. According to the SBA, 99.9% of all businesses in the U.S. are classified as small business. Here in Illinois and Iowa, these SBA percentages are 99.6% and 99.3%, respectively. At face value, these percentages seem highly dubious. This translates to only one out of every 1,000 businesses in the U.S. not being a small business.
The SBA defines small businesses based on North American Industry Classification System (NAICS) codes. The various industry sectors within the U.S. economy are broken down into more than 1,000 sub-classifications, each identified by a unique NAICS code. Each code identifies a size standard that businesses must meet to qualify as a small business under SBA guidelines. That size standard is based on one of two factors: average sales receipts or the average number of employees.
For decades, the SBA has faced criticism its classification system allows for large businesses, including global public companies, to be deemed a small business. In many cases, companies with as many as 1,500 employees or that have annual sales receipts in excess of $30-$40 million are considered small businesses. Consequently, smaller businesses – including entrepreneurs, sole proprietors and self-employed persons – fail to gain access to SBA loans in favor of larger and more-capitalized companies.
The lunacy of the SBA guidelines was recently in full bloom when the NBA franchise Los Angeles Lakers applied for, and received, a $4.6 million PPP loan. According to Forbes, the Lakers’ franchise is valued at $4.4 billion. Under SBA guidelines, the Lakers qualified as a small business because their roughly 300 employees fell under their maximum NAICS limit of 500. The Lakers have since returned the PPP money while the SBA adjusted some of its qualifying standards.
Car dealer AutoNation, Inc., which has 25,000 employees and reported 2019 revenues of $21.3 billion, also received $77 million in PPP loans. AutoNation is a publicly-held company whose stock trades on the New York Stock Exchange under the ticker symbol AN. According to analysis by the Wall Street Journal, dozens of publicly traded companies have received in excess of $500 million in forgivable PPP loans administered by the SBA.
Yes, according to the SBA, 99.9% of American businesses are classified as small business. But reality is far different from the SBA’s self-imposed guidelines. Until the SBA makes substantial, and long-awaited, changes to its classification system, smaller businesses will continue to compete for critical loans against much larger and more highly-capitalized companies. Unfortunately, as a result of the COVID-19 economic fallout, many small businesses might not be around to see these changes.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
