Small Business Administration's Local Development Company Loans Are Making Capital Available--But Other Aims Are Often Subverted

GGD-76-7: Published: Mar 31, 1976. Publicly Released: Mar 31, 1976.

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The purpose of the Small Business Investment Act of 1958 is to improve the national economy in general and, in particular, the small business segment by establishing a program to stimulate and supplement the flow of private equity capital and long-term loan funds which small businesses need for soundly financing their business operations and for their growth, expansion, and modernization. Under this act the Small Business Administration (SBA) was authorized to make loans to local development companies (LDCs) for constructing, expanding, or converting plants for use by specific small businesses. By regulation, SBA includes the purchase of machinery and equipment as plant construction. A unique feature of this program, as it relates to other SBA loan programs, is that it makes loans to the LDC rather than directly to the small business.

SBA has made or guaranteed 5,271 loans valued at over $1 billion since the program began in 1959. Many loans were merely substitutes for assistance available to small businesses under other programs. Congress intended that the program's initiative come from local citizens organized in local development companies. However, the company is often a facade allowing a particular small business to obtain benefits of the longer term, lower interest-rate loans available under this program. Although the agency had set certain eligibility requirements for screening out such companies, it had not exercised strong supervisory control over the program. The agency has also been overstating the program's accomplishments, basing its claims on projected, rather than realized, benefits.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: SBA should: (1) establish a system to monitor local development companies' entry into the program and their financial contributions to the projects; (2) improve the accuracy of reporting program accomplishments; (3) establish criteria for loan approval which relate dollars invested to jobs created; and (4) strengthen the agency's controls for assuring that loans are made only to small businesses whose financial condition warrants assistance.

    Agency Affected:

 

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