Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

SBA Guaranteed Lending and Local Economic Growth

Academic journal article Federal Reserve Bank of Atlanta, Working Paper Series

SBA Guaranteed Lending and Local Economic Growth

Article excerpt

Working Paper 2005-28 December 2005

Abstract: Increasingly, policymakers look to the small business sector as a potential engine of economic growth. Policies to promote small businesses include tax relief, direct subsidies, and indirect subsidies through government lending programs. Encouraging lending to small business is the primary policy objective of the Small Business Administration's (SBA) loan-guarantee program. Using a panel data set of SBA guaranteed loans, we assess whether SBA guaranteed lending has an observable impact on local economic performance. We find a positive and significant (although economically small) relationship between the relative levels of SBA guaranteed lending in a local market and the future per capita income growth in that market.

JEL classification: G38, H81, O16

Key words: small business, economic growth, loan guarantees, credit rationing, relationship lending

SBA Guaranteed Lending and Local Economic Growth

The essence of the American economic system of private enterprise is free competition. Only through full and free competition can free markets, free entry into business, and opportunities for the expression and growth of personal initiative and individual judgment be assured. The preservation and expansion of such competition is not only to the economic well-being but to the security of this Nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and developed. It is the declared policy of the Congress that the Government should aid, counsel, assist, and protect insofar as is possible the interests of small-business concerns in order to preserve free competitive enterprise, to insure that a fair proportion of the total purchases and contracts for supplies and services for the Government be placed with small-business enterprises, and to maintain and strengthen the overall economy of the Nation. (1)

The promotion of small businesses is a cornerstone of economic policy for a large number of industrialized countries. Public support for small enterprise appears to be based on the widely held perception that the small business sector is an incubator of economic growth, a place where innovation takes place and new ideas become economically viable business enterprises. In addition, policymakers routinely point to small businesses as important sources of employment growth--even though economic studies find little evidence to support this claim. It is not surprising, then, that there is widespread political support for government programs, tax breaks, and other subsidies aimed at encouraging the growth and development of small business in the United States, and increasingly, around the world.

A particular area of concern for policymakers is whether small businesses have access to adequate credit. After all, a lot of small firms are relatively young and have little or no credit history. Lenders may also be reluctant to fund small firms with new and innovative products because of the difficulty associated with evaluating the risk of such products. These difficulties are classic information problems--problems obtaining sufficient information about the parties involved in a transaction--and they may prevent otherwise creditworthy firms from obtaining credit. If information problems are substantial, they can lead to credit rationing, that is, loans are allocated by some mechanism other than price. If small businesses face credit rationing, the next Google, Microsoft, or Starbucks might wither on the vine for want of funding. To the extent that credit rationing significantly affects small business credit markets, a rationale exists for supporting small enterprises through government programs aimed at improving small business access to credit.

One specific government intervention aimed at improving the private market's allocation of credit to small enterprises is the Small Business Administration (SBA) guaranteed lending program. …

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