Obama's Budget Has Less Money for SBA Loans. Here's Why That’s a Good Thing

The budget plan President Obama sent Congress yesterday forecasts the fastest pace of economic growth since 2005. It’s also just a proposal that has no hope of getting through the GOP-controlled House.

Still, the plan contains some heartening news for Main Street: The White House expects to spend less than half as much to guarantee Small Business Administration loans for the year ending September 2015 as it has budgeted for the current year.

That doesn’t mean SBA loans will be cut in half. Rather, it means the government thinks its losses on bad loans—the cases where it has to repay lenders for the part of the loans that the SBA backstopped—will drop sharply as Main Street continues to distance itself from the Great Recession.

The Obama budget allocates (pdf) $47.5 million in guarantees for the SBA’s 7(a) and 504 programs—enough to back $25 billion in working capital and real estate loans, according to documents published March 4. Congress also approved $25 billion in loan guarantees for those programs in the current spending plan (pdf) but at more than double the cost—$107 million.

The White House can plan on spending half as much on SBA subsidies in fiscal year 2015 because the agency’s loan portfolio is “vastly improved,” says Beth Solomon, chief executive officer of the National Association of Development Companies, a trade group for SBA real estate lenders. While the SBA guards the formula used to determine how much money will be required to support its loan guarantees, lower subsidy costs probably indicate that the agency expects fewer loans to default in the future.

It’s not the only indication that America’s small businesses are in better shape. Recent research from Moody’s Analytics and PayNet has shown positive signs for U.S. small business borrowers. “Does that mean Main Street is thriving or that the state of small business is robust?” asks Solomon. “It doesn’t, but it means the recovery is gaining.”

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