Small Business Administration

Inadequate Documentation of Eligibility of Businesses Receiving SSBIC Financing Gao ID: RCED-94-182 April 26, 1994

Specialized small business investment companies (SSBIC) often do not comply with the Small Business Administration's (SBA) guidance for documenting the eligibility of the small businesses they finance. GAO estimates that for more than a third of the small businesses financed, SSBICs did not prepare eligibility profiles documenting that the businesses were owned by socially or economically disadvantaged persons. Even when SSBICs did prepare eligibility profiles, they often cited a single factor as the basis for eligibility--typically minority ownership--although SBA has told SSBICs to base eligibility on a composite of factors, such as owners' minority status, limited education, and low income. One possible reason for the lack of compliance with SBA guidance is that SSBICs do not believe documentation is always needed, particularly when the small business is minority owned. SBA's requirement that examiners accept eligibility determinations on the basis of minority status alone continues to be inconsistent with the agency's instructions to SSBICs to use a composite of factors as a basis for determining eligibility. Consequently, examiners would not be expected to spot cases in which SSBICs are financing businesses owned by ineligible persons.

GAO found that: (1) SSBIC often do not comply with SBA guidance for documenting and determining the eligibility of the small businesses they finance; (2) SSBIC did not prepare required eligibility profiles for more than one-third of all the small businesses financed; (3) SSBIC base most of their eligibility determinations on a firm's minority status; (4) although SSBIC examiners are required to use a composite of factors for determining small businesses' eligibility, SBA allows examiners to accept eligibility determinations based upon minority status alone because SBA guidance is inconsistent and confusing; (5) examiners are not able to detect which SSBIC are financing small businesses that are not socially or economically disadvantaged because of inconsistent criteria in SSBIC instructions; and (6) SBA is considering changing its criteria for establishing social or economic disadvantage.

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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