The Economic Impact of the Small Business Administration's Intervention in the Small Firm Credit Market: A Review of the Research Literature

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The guaranteed lending programs of the Small Business Administration (SBA) are large and growing rapidly. The SBA's fiscal year 2009 Performance Budget calls for $28 billion in guaranteed loans for small businesses--a new record for the agency. Some critics of SBA programs suggest they do not help small businesses or overall economic performance. Other critics suggest that these programs unfairly benefit the financial institutions that participate in SBA's guaranteed lending programs. Whereas very little serious empirical evidence exists on whether the net economic impact of the SBA's guaranteed lending programs is positive or negative, a few recent studies provide some insight into the question. In general, they suggest a small positive impact of the SBA's programs on economic performance. However, the results are very tentative and further research is needed to declare a more definitive position. We provide a general overview of the SBA's guaranteed lending programs and summarize the results of these studies.


Federal loan guarantees provided by the U.S. Small Business Administration (SBA) have grown markedly in recent years. During fiscal year 2007, the SBA guaranteed a record $19.8 billion in loans for small businesses--a 57 percent increase over the $12.6 billion guaranteed for fiscal year 2003 (SBA 2008a). Even more striking, the SBA expects to guarantee $28 billion for the fiscal year 2009, representing a 2-year growth rate of about 41 percent (SBA 2008a).

SBA loan guarantees are aimed at a segment of small business borrowers that presumably would not otherwise have access to credit. But the increase in SBA guaranteed lending has occurred at a time when the benefits of SBA guarantees should be declining. Advances in computer and communications technology have substantially reduced information costs to the economy, and technological innovation has improved the informational efficiency of credit markets--especially small business credit markets.

The recent growth of SBA loan guarantee programs, as well as their overall magnitude, raises questions as to whether there are demonstrable benefits to SBA activities and whether the benefits of the programs exceed their costs. Furthermore, because these programs represent society's decision to subsidize credit to promote small business in the United States, we should ask whether government loan guarantees are the best way to do this from a social welfare standpoint. To answer that question, we must know whether the subsidies are delivering their social benefits at the lowest social cost.

Veronique De Rugy (2007), a research economist with the American Enterprise Institute, argues that SBA guaranteed lending programs do not help small businesses or improve economic performance in the areas that receive these loans. De Rugy (2007) claims that SBA programs merely provide large subsidies for the financial institutions that participate in SBA's guaranteed lending programs.

It is very important to understand the empirical implications of De Rugy's argument when conducting research on the economic impact of SBA lending. De Rugy suggests that SBA guaranteed loans are much more "the friend" of bankers than they are helpful to small businesses. De Ruby argues that banks push small businesses into SBA guaranteed loans, as opposed to regular loans, because the guarantee makes the loan more profitable for the bank. This means that a small firm that is already successful and should receive a regular loan is directed into an SBA loan instead. Thus, local geographic areas with large numbers of successful small firms may also be associated with large amounts of SBA lending. (1)

This could lead to a spurious cross-sectional positive correlation between local economic performance and the amount of SBA lending. Empirically, this would incorrectly imply that SBA lending is associated with better economic performance. …


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