Fewer Businesses Failed

Fewer businesses failed in the first 9 months of FY 1976 than during any comparable 9-month period since 1969 (Chart 5). Failures declined over 5% to a rate of 39.4 per 10,000 concerns, compared to 41.6 for the same period a year earlier. After December, the number of business failures declined sharply compared to respective year-ago levels.

Although casualties were lower, their liabilities were higher. A comparison of the two 9-month periods of 1975 and 1976 shows that the average dollar liability of failing firms owing less than $1 million increased 7% from $106,935 to $114,525. The greatest improvement occurred in the manufacturing and construction industry divisions. Casualties were higher in the retail and wholesale food industry and in the hotel and repair services industries.

The 9-month decline in business failures was spread over six SBA regions-— New York, Philadelphia, Atlanta, Dallas, Denver and San Francisco. Failures increased in the remaining four SBA regions-Boston, Chicago, Kansas City and Seattle. Casualty increases were particularly high, 77%, in the Seattle Region.

SEE Study

The SBA "Study of Small Enterprise in the Economy" (SEE Study) was completed after two years in preparation. It sought to determine where small business stands in the economy, the effect on small business of the SBA and other government agencies, and how SBA can assist small business more ·

effectively. The end product is a series of 55 research reports.

In its review of the problems of small business, the SEE Study concludes that, by almost every measure, small firms fare worse under changing economic conditions than do large businesses. "Most of the problems affecting small businesses are those which affect the entire business spectrum, yet these problems become magnified in inverse ratio to the size of the business establishment".

The study cites the interrelationship of management and financing problems. "The characteristic combination of ownership and personal control found in small businesses means that the energy, time, and attention of the owner/manager are often thinly spread. Frequently, the owner/manager, lacking diversified talents, fails to exercise the highest quality of management insofar as he is bound by tradition and is sometimes insensitive to the need for change in business policies and practices.

"Generally speaking, financing of small businesses offers greater risks to lenders and investors than many alternative investments. The most important factor affecting risk-management ability and the depth thereof-is difficult to assess, particularly in new enterprises where there is no record of performance to judge. Repeated surveys in the past seem to indicate that lenders and investors put great emphasis on a firm being well established and having a proven earning record extending over several years. Many small businesses cannot meet these requirements.

"Small firms as a group typically experience a greater incidence of financial difficulty than do large firms. This is evidenced by loan experience and business discontinuances. In some cases, funds may be unavailable or available only on terms which are unacceptable to the owner/manager because of cost or of conflict with his desire to retain an exclusive control of his enterprise. Further, while proven managerial competence demonstrated over years of profitable operation is the principal criterion used by lenders in making investment decisions, it is true that considerable weight is given to the security of 'largeness' and the risk of ‘smallness'.

"The problems facing small business appear to have increased rather than diminished during the past years. Based on these trends, it is projected that life will get harder rather than easier for the small businessman during the next decade."

Financial

Assistance

This year saw the end of a two-year period of declining business loan volume in SBA's financial assistance programs to small firms.

From an all-time peak in 1973, when the volume was 33,948 loans for $2.2 billion, there was a drop during the next two years. However, in FY 1976, loanmaking rebounded to 26,078 loans for nearly $2.1 billion, exceeding in dollars the previous year's total by 30%. Loans to put new businesses into operation represented 28% of the number.

The average loan size was somewhat higher than previous years, probably due primarily to inflationary trends. These volumes include loans made under the Agency's four business-type loan programs: regular 7(a) business loans, Economic Opportunity loans, Development Company loans, and Displaced Business loans.

Direct loans approved by the Agency were valued at approximately $219 million.

An Associated Press dispatch from Lima, Ohio, tells of 12 persons evacuated from a dormitory for the mentally retarded "when smoke detectors in the building were triggered" before it was destroyed by fire. . . . A New Jersey fire chief is quoted that a family of five "would be dead if it hadn't been for their smoke detector alarm...."

There is file full of such stories at Statitrol Corporation of Lakewood
(Denver), Colorado. The common denominator is that the smoke detectors in
those stories are their product. The lives and property saved are the bonus
that the company's president, Duane Pearsall, considers more rewarding than
profits. His efforts won SBA's National Small Business Person of the Year
award for 1976.

The latest chapter of the Pearsall story is such a rapidly escalating success that he already has "graduated" out of the small business class. Earlier in time, with a commercial engineering degree in his pocket, he worked in the air conditioning and heating control field, always probing to develop a new product. But, after 20 years' endeavor, he found himself near bankruptcy.

Increases Reflect Economic Trend

The year's increase is attributable to, first and foremost, the steady improvement in the general economy. Secondly, and of great importance, was the renewed willingness of the nation's banks to participate in the SBA guaranty program. As has been often stated, small firms are the first to be hurt in a general economic slump, and this was true in the turndown in 1974/75. And, while small firms may not be the first to make a comeback when the economy begins to improve, the banks obviously overcame their reluctance to make loans to "smalls" during 1976 with the SBA guaranty, at least to a considerable degree.

Minorities Show Gain

The Agency's efforts to assist minority small businesses also resulted in an increase in loan volume. From the 5,368 loans made the previous year, totalling $229 million, the volume rose to 5,544 loans for $262 million. This was a 21% proportion of total SBA business loan approvals and 13% of the dollar volume.

SBA increased its emphasis on making loans to businesses owned by women, even though the record in previous years was reasonably impressive. In FY 1975, the Agency approved 2,192 loans totalling $108 million; this increased in FY 1976 to 2,981 loans totalling $168 million. This volume represented 11% of the total number of loans made and 8% of the dollars approved. Women-owned businesses comprise just over 4% of all businesses.

New Legislation

In June 1976, the President signed Public Law 94-305, which contained farreaching changes in the overall SBA financing program.

Key features were:

1. authorizing business loans of up to 20 years in those cases where the purpose of the loan is to acquire real property or construct facilities;

2. raising the business loan ceiling to any one borrower to $500,000 under the guaranty program;

3. raising the ceiling for direct, immediate participation or guaranty economic opportunity loans to $100,000;

4. raising the ceiling for Development Company loans, direct, immediate participation, or guaranty, to $500,000;

5. authorizing Development Company loan proceeds to be used for acquiring existing facilities;

6. changing the interest rate on all disaster and economic injury loans to a costto-the-Government formula rate;

7. authorizing a new pollution control financing program under a tax-exempt bond financing arrangement;

8. authorization for banks to own 100% of the stock of Small Business Investment Companies and permitting the organization of SBICs as limited

partnerships, with corporate general partners;

9. authorizing an additional SBIC layer of leverage ($3 for each $1 of private capital and in equity-oriented SBICS $4 for each $1);

10. increasing the maximum leverage for any one SBIC to $35 million and

To Pearsall, that simply meant "one more time." He began making a

mechanism for neutralizing static charges in the air, for which there was a

good market. The principle of such devices is generating ions-
electrically-charged molecules-and during the production of these air
ionizers, it was accidentally discovered that smoke, such as from a worker's
cigarette, could interrupt the effectiveness of the device.

Pearsall turned that defect into an asset---using ionization to detect smoke— and it was the beginning of making a fire alarm system that is common item in the home today.

The first several years after the discovery proved to be another financial struggle in producing and marketing an untried product. There were 10 employees (including his wife, Marjorie, who doubled as secretary, and Lyman Blackwell, his idea man and inventor) working out of what Pearsall describes as a "hole in the wall."