The Small Business Administration's loan guarantee programs can't revive credit access because most small businesses use other types of credit
The Obama Administration recently proposed changes to the Small Business Administration's loan guarantee programs to help small business owners whose access to credit has been reduced as a byproduct of the financial crisis. According to a Feb. 5 White House press release about the plans, "The President is proposing to temporarily increase the maximum SBA Express loan size to $1 million" and "to temporarily allow for the refinancing of owner-occupied commercial real estate (CRE) loans under the SBA's 504 program." In the same release, SBA Administrator Karen Mills explains that "more small business owners will have quicker access to…capital to help restock inventories and support larger revenue sales" and "the ability to refinance into SBA's 504 loan will give them the chance to lock in long-term, stable financing." However well-intentioned these proposals might be, I don't think they will help the typical small business because SBA-backed loans aren't an important source of financing for small businesses. For instance, the proposed change to the 504 loan program won't make much difference because few small businesses have commercial mortgages coming due in the near future. According to Barlow Research's most recent quarterly survey of several hundred companies whose sales volumes range from $100,000 to $10 million, commercial real estate mortgages were held in the fourth quarter of 2009 by only 21% of businesses with $100,000 to $499,999 in sales and 17% of businesses with $500,000 to $999,999 in sales. Moreover, only some of these mortgages will come due in the near future. Nor will raising the limit on SBA Express loans help many small businesses because so few companies receive them. According to the National Association of Government Guaranteed Lenders, banks made 44,220 SBA 7(a) loans in 2009. Given the number of businesses in operation last year, this means that SBA 7(a) loans went to less than 1% of active small businesses with employees. Moreover, in a 2007 report to Congress, the Federal Reserve explained that 7(a) loans account for 90% of all SBA loans, making the number of candidates for the higher limit on SBA Express loans a tiny sliver among the small business population. SBA loans go to atypical businesses
Another problem with raising the limit on SBA loans as a response to small business credit problems is that the recipients of SBA loans are atypical businesses. According to a 2007 General Accounting Office report, SBA loan recipients are much more likely to be startup businesses—defined by the SBA as less than two years old—than more established businesses, which tend to receive conventional loans. SBA loan recipients also tend to be larger. The Barlow data shows that businesses with sales from $500,000 to $999,000 are twice as likely as businesses with sales from $100,000 to $499,999 to have received one. Finally, businesses owned by underrepresented groups—women and minorities—tend to get a disproportionate share of 7(a) and 504 program loans, receiving loans at almost three times the rate of nonminority businesses, according to the GAO report. There may be good reasons to give a disproportionate share of SBA loans to female- and minority-owned businesses, particularly larger startups. But the fact that SBA loans aren't distributed equally across all types of small businesses makes them a poor vehicle for trying to redress the credit problems of the typical small business. In short, the President's proposals to expand SBA programs as a solution to small business credit problems are unlikely to be successful because SBA loans aren't an important source of capital for most small business owners. What would I suggest? If we want to make credit more available to small businesses, we need to focus on the types of credit they most use. According to analysis of the Federal Reserve's most recent Survey of Small Business Finances and a recent article by John Moon, an analyst at the Fed's Board of Governors, these are: Credit cards, both business (used by 48.1% of small businesses) and personal (used by 46.7% of small businesses) Trade credit (used by 60.1% of small businesses) Loans from owners (used by 30.3% of small businesses) Personally guaranteed loans (used by 40.9% of small businesses) and loans with personal collateral pledged against them (used by 17% of small businesses) We might conclude that before the financial crisis, some of these sources of credit were too easy to get, and we might not want to make it easier for small business owners to access them now. However, if we want to expand small business access to credit, we have to enhance small business owners' access to the sources most of them use for financing. These don't include SBA loans.