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The Debate Room: Axe the SBA

Veronique de Rugy, Kristie Darien

June 22, 2007

BusinessWeek

The Small Business Administration is of little value. It gives loans to noncreditworthy businesses, shifting funds away from larger enterprises deserving of credit. Pro or con?

Pro: Gratuitous Crutch

by Veronique de Rugy, Mercatus Center

Congress created the Small Business Administration in 1953 to fix an ostensible problem: Lenders passed over large numbers of small businesses that, if given access to a loan, would generate untapped economic growth. In fiscal year 2008, the SBA will guarantee $28 billion in loans, mainly through its flagship 7(a) loan program. Plenty of evidence indicates, however, that the time has come for Congress to abolish the SBA loan programs. Here are just three reasons.

First, academic literature shows that private capital markets already efficiently allocate loans to small businesses. Banks give credit at the right price to companies that deserve it at that price, including small businesses.

Empirical studies prove that point, too. In 2002, the Federal Reserve Board reported that the demand for small-business financing closely tracked the pattern of debt growth from 1997 to 2002, suggesting a correlation between the demand and supply of financing. Although conditions deteriorated substantially in 2001 and the beginning of 2002, small businesses didn't find financing conditions onerous and weren't suddenly having more difficulty obtaining credit during that period.

Second, shutting down the SBA would hardly stop small businesses from getting loans. Only 1% of small businesses receiving loans (long- or short-term) in a given year receive them from the SBA. And while 29% of 7(a) loans go to minority business owners, SBA distributes loans to roughly only 3% of all minority-owned firms. The same trend is true for women-owned firms. In other words, the SBA is largely irrelevant in the capital market. Even the National Federation of Independent Business, the chief small-business lobbying group, agrees. "Our members tend not to rely on SBA loan programs," Says Andrew Langer, the NFIB'S manager of regulatory policy.

Finally, even though SBA loans tend to flow to riskier borrowers-as its mission intended-it's unlikely that these businesses promote economic growth. SBA loans go to businesses that conventional providers of financing have rejected. This means these loans go to the enterprises least likely to create stable employment, improve technology, or enhance national productivity. Default rates on SBA loans are roughly 17% as opposed to 1.5% for FDIC-insured bank loans and 4.3% for credit card loans.

It is time to abolish the SBA loan programs.

Con: A Crucial Helping Hand

by Kristie Darien, National Association for the Self-Employed

Abolishing the SBA would not only hurt small business by shutting down key programming that aids in business development and growth, but would also ultimately strike at the foundation of our nation's economy. Programs offered by the SBA have a proven track record of effectively aiding very small businesses and our nation's self-employed. Owners of small businesses continue to face considerable challenges in starting and enhancing their enterprises.

One key obstacle is their ability to attain funding. According to a recent online survey by the National Association for the Self-Employed (NASE), nearly 60% of self-employed individuals say they have been forced to rely on personal finances as their primary source of funding when starting their business. That habit continues after the business is established, with 36% continuing to use personal savings as an ongoing means of finance. Big business, on the other hand, is rife with players who could afford to invest their private stashes-but rarely do. Why must the entrepreneur bear the heavier burden?

Historically, traditional lending sources such as banks and other financial institutions have not met the funding needs of micro-business owners. The self-employed and micro-business communities generally need small infusions of capital over their lifetimes. The small scale of the loans needed by micro-businesses as well as lending institutions' perceptions that startups and small enterprises are risky investments have led to a lack of capital resources.

SBA loans such as those available from the Micro-Loan Program fill this funding gap. Access to SBA Micro-Loans is an important avenue to help businesses grow and boost the local economies.

In addition to financing, SBA offers training programs such as those provided by Small Business Development Centers, which give essential, one-on-one assistance to current and prospective entrepreneurs. The centers support entrepreneurs throughout every stage of their business's creation and growth. And the SBA Office of Advocacy has long served as a strong voice within government to ensure that small business gets a fair shake in the regulatory process.