One small but important part of the small business credit market are loans guaranteed by U.S. Small Business Administration (SBA). The goal of federal SBA loan guarantees is to enable banks and other qualified lenders to make loans to small businesses that fall just shy of meeting conventional lending criteria, thus expanding the number of small businesses that are able to obtain financing. These guarantees cost taxpayers very little as the program costs, including defaults, are largely covered by fees charged to borrowers.
The SBA’s flagship loan programs is the 7(a) program, which guarantees up to 85 percent of loans under $150,000 and up to 75 percent of loans greater than $150,000 made to new and expanding small businesses. The SBA’s maximum standard loan under the 7(a) program is $5 million, raised from $2 million in 2010. The SBA’s other major loan program is 504 program, which provides loans for commercial real estate development for small businesses. Under these two programs, the SBA approved loans valued at $23 billion in 2013, amounting to 3.7 percent of small business lending. (The 7(a) program accounts for almost 80 percent of this.)
Although the SBA’s loan guarantees account for a small share of overall lending, they play a disproportionate role in credit access for some types of small businesses. According to a 2008 analysis by the Urban Institute, compared to conventional small business loans, a significantly larger share of SBA-guaranteed loans go to startups, very small businesses, women-owned businesses, and minority-owned businesses.
SBA loans also provide significantly longer terms, which improve cash flow and thus can make the difference between success and failure. More than 80 percent of 7(a) loans have maturities greater than 5 years, and 10 percent have maturities greater than 20 years. This compares to conventional small business loans, almost half of which have maturities of less than a year and fewer than one in five have terms of five years or more.
Although federal guarantees are particularly important for very small businesses, which have an especially tough time in the conventional loan market, the SBA has dramatically reduced its support for very small businesses over the last few years and shifted more of its loan guarantees to larger small businesses. The SBA’s definition of a “small” business varies by sector, but can be quite large. Retailers in certain categories, for example, can have up to $21 million in annual sales and still be counted as small businesses.) The number of 7(a) loans under $150,000 has declined precipitously. In the mid 2000s, the SBA guaranteed about 80,000 of these loans each year, and their total value accounted for about 25 percent of the loans made under the program. By 2013, that had dropped to 24,000 loans comprising just 8 percent of total 7(a) loan volume. Meanwhile, the average loan size in the program doubled, from $180,000 in 2005 to $362,000 in 2013.
What has caused this dramatic shift is not entirely clear. Although the SBA claims it has tried to structure its programs to benefit the smallest borrowers, critics point to policy changes in 2010 that raised the 7(a) loan cap from $2 million to $5 million. The move, which large banks advocated, has helped drive the average loan size up and the number of loans down.