Bush Ownership Society for Minorities? Bush's 2006 budget provides no funding for the Small Business Administration Program

Originally published in the Milwaukee Journal Sentinel (Wisconsin) February 10, 2005 

Copyright 2005 Journal Sentinel Inc.


By: RICK ROMELL rromell@journalsentinel.com, Staff, Milwaukee Journal Sentinel


President Bush wants to eliminate a program that funnels so-called micro loans to entrepreneurs, a move critics say will hurt very small businesses that depend on the financing.

Bush's 2006 budget provides no funding for the Small Business Administration program, which last year provided about 2,400 loans of under $35,000 each.

"This is very unfortunate news," said Wendy Baumann, president of the Wisconsin Women's Business Initiative Corp., a leading micro lender that draws a significant share of the money it loans from the federal program.

"The Bush administration is making a mistake," said Bill Edwards, executive director of the Association for Enterprise Opportunity, a national group supporting micro enterprises.

But an SBA spokesman said other agency programs could provide entrepreneurs with very small loans at better rates than the micro loan program.

In fact, communications director Raul Cisneros said, the SBA?s flagship 7(a) program already provides 10 times more loans of less than $35,000 than the micro loan effort.

"For the taxpayer and even for the borrower, the 7(a) program is better," Cisneros said.

Interest on the average 7(a) loan is 3 to 4 percentage points lower than that on the typical micro loan, he said.

But the average 7(a) loan is $150,000 ? more than 10 times as much as the average micro loan. Larger loans tend to carry lower rates, Baumann said.

Further, she said, 7(a) loans are made by banks to people and businesses that meet the banks? credit standards.

Most micro borrowers, on the other hand, would be rejected by banks because they are launching high-risk start-ups, or because they have checkered credit histories, Baumann said.

"By nature, a lot of these micro loans tend to be much riskier," Edwards said. "They?re generally not fully collateralized."

Baumann also said some micro loans are for less than $1,000. More conventional lenders may be reluctant to handle such small amounts, she said.

Edwards questioned why Bush, who has laid out a vision of what he calls an "ownership society," would want to eliminate a program that helps participants become independent business people. Bush's vision is one in which people who own a business or property have a greater stake in the society.

Edwards said organizations such as the Wisconsin Women's Business Initiative that use the micro loan program have to repay SBA, and that none had defaulted since the program began in 1992.

The business initiative's portfolio is heavily weighted toward women, minorities and people with relatively low incomes, Baumann said. Nationally, 25% of micro loans last year went to African-Americans and 18% to Latinos, according to the Association for Enterprise Opportunity.

Baumann said the business initiative borrows from the federal program at about 2% to 3% and lends at about 11%.

Agencies such as the business initiative use the difference to cover losses and to help fund their operations, Edwards said.

Baumann said the business initiative last year made more than $500,000 worth of loans with money from the federal micro loan program. Over the last several years, she estimated, the program has accounted for 30% to 40% of the total the initiative has lent.

"It?s an important funding source," she said.

Baumann expressed hope that Congress would restore the funding as it did last year. Chances are good because lawmakers see "that this micro loan program works," she said.