Defense Conversion

Capital Conditions Have Improved for Small and Medium-Sized Firms Gao ID: NSIAD-94-224 July 21, 1994

Cuts in the Defense Department's (DOD) procurement budget are forcing a consolidation of the defense industrial base and job loss for many defense industry workers. This situation has prompted initiatives to help defense firms, particularly small ones, convert defense-related technology to commercial use. The Defense Department is authorized to provide up to $15 million for guaranteed loans to help small firms in the defense industry convert to commercial applications. This report provides information on general trends in the availability of capital for small and medium-sized firms and on federal and nonfederal initiatives to improve access to capital for these firms.

GAO found that: (1) although the decline in investments affected the availability of capital, access to capital for small and medium-sized firms has since improved; (2) overall business investments declined during the early 1990's because of the recession and changes in bank regulation which constrained the supply of financing; (3) a number of federal and nonfederal initiatives are underway to address the capital needs of small and medium-sized businesses; (4) the Small Business Administration has expanded its guaranteed lending authority and is taking steps to simplify its loan processes; (5) Congress is considering legislation that would help small and medium-sized businesses obtain financing; (6) a number of states have established loan or venture capital funds to assist local businesses and promote local economic development; (7) small and medium-sized defense firms attempting to convert to commercial production lack sufficient business plans and have difficulties in making timely and accurate pricing decisions; and (8) a guaranteed loan program would not address the challenges faced by these firms in identifying commercial markets.

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