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Will Small Businesses Cash In on Stimulus Dollars?

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The $787 billion stimulus package signed into law in February has reignited concerns among some small-business owners and advocates, who question whether the U.S. Small Business Administration is prepared to handle the massive expansion of lending and investment programs.

The government's goal to award almost one quarter of its contracts to small businesses should mean plenty of work for the sector that generates six out of 10 of the country's new jobs. But these days optimism is quickly replaced by frustration. That's because many entrepreneurs are skeptical these contracts will actually go to small firms. They point to widely reported cases in which large companies have obtained small-business contracts through loopholes, government mismanagement, and even fraud.

House Committee on Small Business Chairwoman Nydia M. Velásquez (D-N.Y.) said the committee is specifically concerned about problems with the HUBZone program, which provides contract opportunities to small businesses in low-income or underdeveloped areas. An investigation by the Government Accountability Office found the SBA was doing next to nothing to verify the information of applicants who misrepresented the locations of the companies.

"The fact that (fraud) is still occurring is disturbing," she said.

Headed into the second quarter of 2009, reforms are planned. The administration intends to hire dozens more staff members to boost productivity, verify the sizes of companies, and enforce contract laws, according to Velasquez and other SBA officials.

The agency also plans a comprehensive review of those small companies that felt slighted and reach out to them to encourage them to apply for new contracts.

In mid-March, the House Committee on Small Business submitted recommendations for the Small Business Administration's Fiscal Year 2010 budget, doubling previous budgets by proposing $1.43 billion in funding for agency programs that will assist small businesses. The recommendations submitted by the committee would restore SBA funding levels similar to those under the last year of the Clinton administration.

Plans also call for $69.5 million for targeted SBA contracting programs that help small firms navigate the federal procurement process, funding for Entrepreneurial Development Programs such as the Small Business Development Centers, Women's Business Centers and other minority-run programs.

More change is ahead.

Although some critics are skeptical of the selection of venture capitalist Karen Mills to serve as SBA administrator, she has bipartisan support in Congress and she has pledged to immediately free up cash for small businesses, in an effort to salvage the battered agency and reinvigorate the economy.

Flaws In Process Cited
The SBA manages and oversees the procurement process across the federal government, including contracts tailor-made for small companies and disadvantaged and minority-owned businesses.

It negotiates small-business contracting goals with federal agencies, and then tracks their progress.

But the SBA's Inspector General and other studies have shown that management flaws have allowed large firms to receive small-business awards. A Washington Post analysis in October revealed that federal agencies made at least $5 billion in mistakes in their procurement reports, listing companies such as Lockheed Martin and Dell Computer as small. (The firms denied it was their fault).

In a HispanicBusiness magazine interview with Hector Barreto, the former administrator acknowledged serious contracting problems under his watch. But he believes that the widely publicized contracting problems were the exception rather than the rule. Toward the end of his time as head of the SBA the agency began work on closing loopholes that allow companies to continue to be classified as small businesses if they were purchased or merged with larger firms. Some of those regulations, such as a 2007 rule that requires small companies to recertify their size if they merge or are purchased by a big firm, were put in place after he left.

"It takes a long time to change regulations and policy at the federal level," Mr. Barreto said. "We were working on them for a couple of years before they were actually put in place."

He hopes the new leadership is able reinvest in small programs.

"At the end of the day the economy is not going to grow and it's not going to move forward unless all businesses are playing the role of the economic engine," he said.

Calvin Jenkins, the SBA's Deputy Director for Government Contracting and Business Development, said that the mistakes are mostly due to loopholes, coding discrepancies and human errors. He said steps have been taken to address the issues.

"We have a data problem. We know there are errors in the system. We know the data is not 100 percent accurate. We are constantly reviewing it and working with the federal procurement community to ensure that it is more accurate," he said.

The agency's Inspector General has acknowledged progress. But it still considers the problem to be the biggest management challenge of the agency.
In a recent report, it said that procuring agencies are still inaccurately counting contracts awarded to small firms. It calls for more training of contracting personnel across the federal government, and more regulations strengthening oversight of size standards as well as a requirement to have federal agencies certify their data.

The economic recovery package provides $730 million for lending and investment programs, loan fee reductions and higher loan guarantees. It also sets aside about $25 million to pay for more staff.

Mills' selection has angered some who argue venture capitalists are unfairly benefiting from federal contracts by buying smaller companies and keeping their contracts and in some instances the small-business status.

Lloyd Chapman, president of the American Small Business League, said this practice harms legitimate small businesses that are unable to compete with companies that have the financial backing of outside investors.

He said it's like a boxing fight with boxers from different class weights.

"This is not what Congress had in mind when it passed the Small Business Act," he said.

Mr. Jenkins, from the SBA, said that while this may not be fair, it is not illegal. He said the agency's role is to make sure the federal government doesn't continue to say contracts are going to small businesses when they are not.

By correcting these mistakes, federal agencies "will need to go back" and reach out to other small businesses in order to meet their procurement goals, he said.

Small Business Definition
The definition of a small business varies by industry. Some companies can have up to 500 employees, while others can generate up to $31 million in annual revenues.

Congresswoman Velásquez said that the SBA needs a better process to determine when a company is considered small because the criteria have a big impact on which businesses qualify for certain benefits and how the contracting process plays out.

Velásquez said the agency faces big, urgent challenges.

"In a recession, the role of the SBA in fostering small-business growth is more important, not less," she said, adding "the SBA does not currently have the staff or the finances to handle the expected increase in small businesses."

The agency has already seen a spike in companies applying for its programs.
In October of last year it received 60 to 80 applications a week for its 8(a) program, which helps disadvantaged businesses compete for federal contracts. In February, it was up to a 100 a week.

Looking Ahead
Edward Duarte of Aztec Consultants, a construction firm in San Ramon, Calif., said working with the federal government is easier said than done.

He should know. The company was an 8(a) certified contractor for eight years.

He's not so much concerned about fraud or loopholes. He's not afraid of venture capitalists because it's not how much money you have, but how low you can go on a bid.

As far as he's concerned, the main problem is red tape.

Building houses in a residential area is the same as building a new restroom for the Navy. There are prevailing wage issues, insurance requirements, and too much paperwork involved, he added.

And understanding the procurement process is a challenge in itself, he said.

These days, bidding for a federal contract is even more difficult because there are more companies competing since work in other places has dried up.

"We are doing a disfavor to smaller companies when we are telling them that there are billions of dollars worth of work out there, and by telling them 'come on, get your share,'" he said. "It's not that easy."

Belinda Guadarrama knows that all too well.

"It's a huge problem," said Guadarrama, who bids on federal contracts for her California-based computer supply company, GC Micro. Ms. Guadarrama's company has been installing software and hardware for federal agencies for more than two decades.

"It's interesting that this issue still keeps coming up after so many years, so many investigations, and no one seems to want to do anything about it."

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