Aida Alvarez, the new chief of the Small Business Administration, dodged her first bullet early this month.

With funding strained, she had faced shutting down the agency's largest lending program before the end of the fiscal year. Ms. Alvarez-and the 8,000 lenders that depend on the program-were saved by a last-minute recalculation of the agency's costs.

Ms. Alvarez may have to get used to tight situations. As small businesses proliferate and clamor for loans, the SBA, founded in 1953, is starting to creak and groan.

Just look at its staff. While the SBA's financing activity is up sharply, the staff is down more than 25% from five years ago, to 2,890 full-timers, as a result of congressional budget-cutting.

"We really need to frankly assess the effect of the downsizing," said Ms. Alvarez, who assumed her post in February. "There is no question people are stretched thinly to do their jobs."

Meanwhile, the SBA's lending authority for next year remains decidedly unclear. Though the agency has asked to back up to $10 billion of loans in its main program-for so-called 7(a) loans-lawmakers may balk. Even if Ms. Alvarez prevails, $10 billion may not be enough; it would be roughly the same as this year's lending, and loan demand is clearly on the rise.

"Her No. 1 job is to figure out the problem with the continued shortfall (in SBA lending authority) and how to fix it long term," said Anthony J. Feraro, senior vice president of small-business lending at Zions First National Bank.

Adds Paul Leliakov, president of commercial lending for the MoneyStore: "She's inherited a fairly difficult set of circumstances."

Ms. Alvarez, 47, appears up to the challenge. She is thoroughly versed in the ways of Washington, having just completed a nearly four-year stint as the chief regulator of Fannie Mae and Freddie Mac, the housing finance titans. Ms. Alvarez did this as the first director of the Office of Federal Housing Enterprise Oversight, a unit of the Department of Housing and Urban Development.

Earlier, she had been a journalist and investment banker.

"She is one of the smartest, hardest-working people-and bulldog in her determination," said Henry G. Cisneros, former secretary of HUD.

Ms. Alvarez, politically connected through involvement in the Clinton- Gore presidential campaigns and work on Hispanic-American initiatives with Mr. Cisneros, was quickly confirmed as SBA administrator, succeeding Philip Lader.

In an interview, she expressed enthusiasm for her new mission.

"The heart of the SBA is this notion of access to capital and credit for the little guy who couldn't otherwise get started or stay in business," she said.

As it happens, there are more little guys now than ever, and they are driving the economy.

More than 842,000 small businesses were created in 1996, a 42% increase from 1982, according to the SBA. The nation's 23 million small businesses employ more than half the private work force and generate better than half of gross domestic product.

And when it comes time to secure financing, many of those businesses and their lenders turn to the SBA. The agency will make or guarantee more than $11 billion of loans in fiscal year 1997, and it has a portfolio of $36 billion.

Under the popular 7(a) program, the SBA typically backs 75% to 80% of loan amounts up to $1 million. The number of 7(a) loans produced annually has nearly tripled in this decade, to more than 43,000 in 1996. And the annual dollar volume has almost doubled, to $7.3 billion.

Against this backdrop, Ms. Alvarez is leading the SBA through some sweeping operational changes. For example, it is extricating itself from servicing loans and liquidating assets of defaulted borrowers, turning those chores over to lenders. Instead, SBA will become more of a watchdog agency overseeing lenders and helping manage risks.

"The agency is in the midst of a major transformation in the way it does business," Ms. Alvarez said.

The SBA is working to upgrade its computer systems and bolster its technical staff. And Ms. Alvarez is trying to promote more securitization of small-business loans, which in turn would create more loan funding availability. The SBA is opening up to banks the securitization of the unguaranteed portion of 7(a) loans; that had previously been restricted to nonbank lenders.

As she proceeds, Ms. Alvarez has been traveling the country to get opinions from lenders. This Thursday, about 70 lenders are to meet with her in Washington to discuss the future of the 7(a) program.

Many lenders say she is well suited for her new role.

"Her background is the right fit for where the SBA needs to go," said Michael Gallagher, government loan programs manager at Wells Fargo Bank. "What remains to be seen is how far it's going to go."

Some lenders are critical, though, of Ms. Alvarez's strong support for the SBA's programs that prequalify loans for small businesses owned by women and minorities, said Brad Christensen, executive vice president of Emergent Business Capital Inc.

"They are concerned that the 7(a) program may be dismembered, with the other programs receiving more funding and emphasis," Mr. Christensen said.

The SBA responds that its credit and eligibility standards are the same for all loan applicants but that it is providing needed technical assistance to some businesses owned by women and minorities before they go to a lender.

Born in Aguadilla, Puerto Rico, Ms. Alvarez is the first Hispanic woman and first person of Puerto Rican descent in the presidential cabinet.

She grew up in New York and, after graduating from Harvard College, took a meandering career path.

For 11 years, she worked in journalism at the New York Post and as a television reporter and anchor. In 1982, she won an Emmy for her reporting on guerrilla activities in El Salvador.

She later switched to investment banking, specializing in municipal finance at Bear, Stearns & Co. and First Boston Corp.

In 1993, Ms. Alvarez was appointed the first director of OFHEO. The staff she assembled is still at work on the formidable task of designing risk-based capital standards for the secondary-market agencies.

At OFHEO, Ms. Alvarez had to walk "a tightrope" between the supporters and detractors of the agencies, Mr. Cisneros said. Although she struggled at first, "she emerged with her reputation intact under an almost impossible set of tensions," he said.

Ms. Alvarez will need those political skills at SBA, observers said.

Her relationship with the House and Senate small-business committees started poorly because of criticism that she and her staff had hidden for months the fact that the 7(a) program was in trouble. The image problem was compounded this month when the General Accounting Office discovered that the SBA had overestimated loan guarantee costs because of an accounting error.

However, some key members of Congress appear sympathetic to the agency's plight.

"Congress has not provided a sufficient amount of money for the success of the program," said Sen. John F. Kerry, D-Mass. After several years of forcing cutbacks at the SBA, Congress has reached "a point of confrontation with reality," he said.

Ms. Alvarez, for her part, has created an advisory group of lenders to propose ways to fund more loans without adding to SBA's budget. So far, suggestions include switching real estate loans to another existing program, making it easier for lenders to combine SBA-backed loans with conventional loans, and shortening the term of the guarantee.

The agency will make recommendations to Congress by midsummer, Ms. Alvarez said.

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