NCPA - National Center for Policy Analysis

Losing Other People's Money

September 11, 1996

Firms which use government loans for start-up and expansion are far more likely to flop than those which don't, according to a recent study by the Federal Reserve Bank of Chicago.

A federal program allows Small Business Investment Corporations (SBICs) -- which depend on money from the federal Small Business Administration, as well as private funds -- either to invest in small firms or issue them loans.

The study looked at the economic performance of about 280 SBICs between 1986 and 1993.

  • Over the period, these institutions turned in a dismal return of - 0.2 percent per year to their shareholders.
  • These SBICs failed at a rate of 11 percent a year -- compared with a 5.5 percent failure rate among savings and loans and a 1 percent rate among commercial banks.
  • More than half of those tracked were liquidated or voluntarily turned in their licenses before the close of 1993.

According to the General Accounting Office, the Small Business Administration is owned nearly $500 million from failed SBICs and similar investment companies that use federal subsidies to buy stock only in minority-owned firms. Also, authorities have found many examples of improper financial dealings by SBIC managers.

And why not? After all, critics note, its only other people's money.

Source: Perspective, "Risky Business," Investor's Business Daily, September 11, 1996.


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