SBA Struggles as Citigroup, AIG Hog Money

WASHINGTON ( TheStreet) -- When asked how the government is helping small-business owners, Karen Mills cites "the three Cs." "Contracting" and "counseling" are making strides, the head of the Small Business Administration says. But "capital" has been stymied as large banks and insurers such as Citigroup ( CITI), Bank of America ( BAC) and AIG ( AIG) have received billions of dollars in bailouts to the detriment of smaller companies.

The SBA must ensure that 23% of government contracts go to small businesses, which amounted to about $100 billion last year, says Mills, who took the helm in April. The organization under Mills' regime also has been pushing the idea of regional economic clusters, partnerships of small manufacturers and big businesses, government agencies or academic institutions. Those are designed to spur economic growth, such as helping suppliers find new connections in new industries -- those in military defense, for example -- in the wake of the auto industry's downward spiral.

"Regional economic clusters are a very effective way to get small businesses to group together and get economies of scale that they lack just because they're small," Mills says. "We should not forget how much opportunity there is in manufacturing."

Meanwhile, Mills says she has seen a 7% uptick in the SBA's counseling services, such as the mentor/protege program in which a big company takes a disadvantaged firm under its wing so the two can compete for government contracts together. Granite Construction ( GVA) last month agreed to mentor contractor HydroTech Inc.. Northrop Grumman ( NOC) and Raytheon ( RTN) have mentoring relationships with parts manufacturers.

Furthermore, small-business owners can seek free counseling services from 1,400 individuals at 68 field offices across the country. "I think what was not recognized, in the past several years, was what a strong bone structure we had," Mills says.

But the SBA's loan programs have struggled to meet demand as access to capital gets tougher for small businesses everywhere. To wit: 39% of small businesses were unable to secure adequate funding in 2009, according to the National Small Business Association, an advocacy group in Washington. A total of 24% reported worsening terms on bank loans in the past year, and 64% said there have been increases in credit-card fees and interest rates -- and a decrease in credit limits -- in the past six months.

The American Recovery and Reinvestment Act of 2009 included provisions to eliminate fees and raise the maximum guarantee on certain SBA loans from 75% to 90%, a move that has inspired 1,200 more banks to join the SBA loan program since the act came into force. "We were very successful at deploying our recovery-act funds and getting them into the hands of businesses that needed capital," Mills says.

But the program was a little too successful. The $375 million allocated for the program ran out in November, leaving applicants stuck in a queue. In December, President Barack Obama signed legislation to allocate an additional $125 million to support $4.5 billion in additional SBA loans. The SBA expects that money to carry SBA Recovery Act loan activity for another month.

"We're increasingly concerned by the SBA loan programs," says Molly Brogan, vice president of public affairs for the National Small Business Association. "There was a quick extension, but we're worried that the money is going to run out soon. The more this program goes up and down and up and down, the harder it is for people to look toward the SBA as a source of capital."

Meanwhile, small businesses are frustrated as "too-big-too-fail" banks and insurers such as Citigroup, Bank of America and AIG have received hundreds of billions of bailout dollars through the Troubled Asset Relief Program, or TARP.

The Treasury Department has extended TARP through October, and in doing so has announced vague intentions to use some of the funds to speed up small-business lending. But the NSBA wants definite plans. And it's hard to ignore the fact that the Obama administration hasn't reinstated the SBA administrator as a Cabinet position, as the Clinton administration did.

"We've heard a lot of talk about the idea of using TARP funds," the National Small Business Association's Brogan says. "We started talking about this back in April, and nothing's happening on it. There's nothing concrete, and nothing's being done. Moving on something like that is something that needs to happen."

-- Reported by Carmen Nobel in Boston.