Under fire: first 8 set asides, now small business investment companies are being attacked

Black Enterprise, Nov, 1995 by Rhonda Reynolds

As the Small Business Administration continues to fulfill its federal mandate to streamline all budgets, a telescope has been pointed toward minority business once again. The target this time: The SBA's Specialized Small Business Investment Company (SSBIC) program, which is charged with investing in socially or economically disadvantaged and minority-owned businesses.

SSBICs are privately held firms that receive funds by selling debentures (loans) or preferred stock to the SBA. SSBICs also leverage outside capital and then invest the money in disadvantaged or minority-owned businesses. For every dollar SSBICs invest, the federal government matches up to $4 in loans.

Last year, the SBA called for an in-depth review of 91 SSBICs. Together, these companies hold $194 million in private capital and $276 million in SBA funds.

According to findings officially released this past August, SSBICs invest heavily in firms that have either lost money or gone out of business. The findings also show that SSBICs have more money in cash assets than in investments in minority businesses. Moreover, SSBICs tend to invest heavily in firms with limited job-creation potential.

Wayne State University Professor Timothy Bates, who conducted the study, admits that he crafted the report to provoke a response and stimulate debate. Bates consults with the SBA's SSBIC Advisory Council, made up of 17 leaders in the investment field, small business owners and SSBIC managers.

But minority-business advocates are now scrambling to do damage control and keep the program from being dismantled should the issue come before Congress. They fear the GOP could use the study to fuel ongoing debate over assistance programs targeted at minorities.

Too many people are concentrating on a few flaws that have been uncovered, says Bruce Gamble, president of the National Association of Investment Companies, the industry trade group for SSBICs and minority-focused investment companies in Washington.

"The study was supposed to be used to reform the program," says Gamble, not as ammunition to get rid of it." Taking aim and attacking the biggest flaws spotlighted in the study, Gamble says SSBICs have invested in firms which have failed, but he blames the original design of the program.

"The program was essentially started as a social remedy after the Watts riots [in the late '60s]. Now it needs to be reformed and reinforced as an economic tool," says Gamble, who is lobbying to put an end to such barriers as burdensome government regulations and expensive federal paperwork that often help drag small companies into the red..

Other critics note that the terms socially and economically disadvantaged would sometimes disqualify experienced business owners or African Americans and Latinos with advanced degrees. As a result, some loans went to those who had great ideas but lacked the skills to keep their ventures going. Yet another counterpoint: SSBICs must keep a significant amount of cash in their accounts because the SBA debenture can be recalled at any time.

Is the SSBIC program in line to be dismantled? At press time, the House of Representatives Appropriations Committee submitted a budget to Congress that had no mention of "leverage" funding for SSBICs.

"That's a bad sign," says Gamble. "Most [Congressional] Small Business Committee members have less than two years in office, and they don't understand the merits of the program."