November 1, 2007

Small Business Administration: Is the 7(a) Program Achieving Measurable Outcomes?

Key materials
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Our Findings

  • There no significant failure of the private sector to allocate loans efficiently. The literature that does refer to a market failure is grounded in old research that doesn't take into account the tremendous developments in information technology that have reduced the high cost of accessing information about small business credit worthiness. 
  • The Small Business Administration (SBA) 7(a) loan program is largely irrelevant in the capital market. In a given year, roughly 1 percent of small business loans are SBA loans. The private sector finances most loans without a government guarantee.
  • There is no shortage of firms or new startups in America. The data suggests that if the 7(a) loan program did not exist, entrepreneurs would start new businesses at the same rate they do now.
  • In 2004, 29 percent of 7(a) loans went to minority business owners, but SBA distributed loans only to 3 percent of all minority owned firms. The same trend is true for women-owned firms.
  • The SBA doesn't measure the performance of its loan programs.

Recommendations

  • The SBA should implement outcome performance measurement of its loan programs. It should include an analysis of the program's effects on economic growth and a comparison of the benefits of the program to its long term costs. What it should not include is a count of the number of jobs created. The mere creation of jobs is not an appropriate economic policy objective, because you can add jobs to an economy yet create no economic value.
  • Measuring the performance of SBA should also include looking at who are the true beneficiaries of the program. Mercatus Center research points at 10 of America's biggest banks, not small businesses. 
  • If SBA loans are found to be irrelevant in the capital market, SBA lending programs should be terminated.