Most Borrowers of Economic Opportunity Loans Have Not Succeeded in Business

CED-81-3 Published: Dec 08, 1980. Publicly Released: Dec 08, 1980.

Highlights

The Small Business Administration (SBA) Economic Opportunity Loan Program (EOL) has been a means for sustained economic progress for relatively few borrowers. The program originated with the Economic Opportunity Act as a part of the war on poverty. Today, it is part of a larger SBA effort involving several programs to help socially and/or economically disadvantaged people create and maintain small businesses. To be eligible for a direct loan, a business must be rejected for financing by two banks and found unqualified for the principle business loan program of SBA. Borrowers that GAO sampled were inexperienced, had low personal investments, and operated in disadvantageous locations. They were usually just starting out in business and owned mostly very small retail or service businesses with low sales and few or no employees.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should determine whether the higher interest paid by borrowers of direct EOLs is justified by the greater risk associated with EOL lending or whether in the interests of fairness for disadvantaged businesses, the rates should be the same.	Closed	Please call 202/512-6100 for additional information.
Congress should amend the Small Business Act by changing section 7(i)(5)(D) of the Act to incorporate the formula used in section 7(a)(4) if it finds that the interest rates should conform and that the 7(a) rate is appropriate for both programs.	Closed	Please call 202/512-6100 for additional information.
Congress should monitor SBA implementation of the GAO recommendations for management improvements made in this report and their impact on program results.	Closed	Please call 202/512-6100 for additional information.

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Small Business Administration	The Administrator of SBA should prevent the use of refinancing involving large additional outlays to borrowers who are unable to repay their first loan.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should establish program goals for producing successful, lasting businesses and monitor the progress of the program toward reaching these objectives.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should assure that loans not be made to applicants who need but refuse management assistance in making initial business decisions, or deciding how to spend loan proceeds.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should upgrade minimum credit standards for the program so that only the best qualified EOL applicants who can be funded within a reasonable time are admitted onto the waiting lists.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should monitor closely the compliance of loan officers with recently established procedures calling for a fuller consideration of whether loan applicants are disadvantaged.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should test the effectiveness of three techniques for alleviating borrowers' undercapitalization and inexperience (1) extended grace periods on initial interest repayments; (2) graduated loan repayment schedules providing for increasing payments during the life of the loan; and (3) more intensive and timely management assistance.	Closed Please call 202/512-6100 for additional information.
Small Business Administration	The Administrator of SBA should require more comprehensive examinations by loan officers of the prospective borrowers' ability to repay and financing needs, including better analyses of projections, anticipated cash flow, management capability, and the sufficiency of loan amounts.	Closed Please call 202/512-6100 for additional information.

See All 7 Recommendations

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