Most Borrowers of Economic Opportunity Loans Have Not Succeeded in Business

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.

The program's ability to improve the economic condition of low-income and disadvantaged people could be improved if SBA corrected deficiencies in management and operation and employed new techniques to overcome borrowers' inexperience and low capital investment. GAO found that the number of paid-in-full loans overstated the number of borrowers who had successfully completed the program and established lasting businesses. The outlook for many borrowers with outstanding loans is not good. As of June 1980, the proportion of portfolio loans which were delinquent or in liquidation was higher than it had been at the end of any of the last 8 fiscal years. The program produced few lasting businesses because: loan officers did not adequately examine loan applicants' qualifications and needs; SBA focused efforts on lending in quantity but not lending effectively; SBA was inattentive to program results, not measuring the program's contributions toward improving the economic condition of disadvantaged people; and there are long waiting periods for loans and less qualified applicants may receive loans at the expense of better qualified applicants. SBA has tried special assistance but without much success. Borrowers have not usually accepted the management assistance offered, and it was of too limited scope and came too late.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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