The promotion of small business is a cornerstone of U.S. economic policy, and encouraging lending to small businesses is one of the primary purposes of the Small Business Administration (SBA). Since its creation in 1953, the agency has mushroomed into a multibillion dollar financial institution that has given assistance to nearly 20 million small businesses, often through the SBA’s principal business loan program, the “Basic 7(a) Loan Guaranty” program.

In this comprehensive study of the SBA’s loan programs, AEI resident fellow Véronique de Rugy analyzes the impact and efficacy of these government-guaranteed loans. De Rugy asks the following questions:

• Are these loan guarantees desirable?
• Should the SBA remain in the banking, credit allocation, and subsidy business?
• Is there a market failure that justifies government intervention?
• If there is a market failure, are the SBA programs well designed to address the problem?
• If there is no market failure, does the SBA help achieve policy goals important enough to justify its meddling in a well-functioning market?

Véronique de Rugy concludes that:

• There is no apparent failure of the private sector to allocate loans efficiently.
• Even if one assumes that a market failure exists that prevents small businesses from receiving adequate credit, the SBA’s loan programs are not an effective solution to the problem.

Looking specifically at the “Basic 7(a) Loan Guaranty” program loans, de Rugy finds that:

• No more than 1 percent of small business loans are guaranteed by the SBA each year. The private sector finances most loans without government guarantee, making the SBA largely irrelevant in the capital market.
  
  
• There is no shortage of firms or new startups in America. Data suggests that new businesses would be started at the same rate even without the SBA’s 7(a) loan guarantee program.
  
  
• In 2004, in accordance with the SBA’s goal of helping minority- and women-owned small businesses, 29 percent of 7(a) loan guarantees went to minority business owners. But that represents only 3 percent of all minority-owned firms in the U.S. The same trend is true for women-owned firms.
  
  
• Each year, 75 percent of SBA 7(a) loan guarantees go to about 1 percent of all small businesses in the service, retail, and wholesale sectors.
  
  
• Even in the twenty-five sectors of the U.S. economy that receive the largest share of SBA 7(a) loan guarantees--such as restaurants, grocery stores, and drycleaners--less than 0.5 percent of the small businesses in those sectors benefit from the guarantees each year.
  
  
• The business sectors targeted by the SBA do not seem to have any particular need for government assistance. In the sectors that account for 75 percent of SBA lending markets are functioning well. There are an overwhelming number of firms, a large amount of competition, and no empirical evidence that the market is being underserved in these areas.
  
  
• Since the small distribution of SBA loan guarantees in highly competitive sectors is unlikely to greatly improve the prices and products available to consumers or significantly bolster economic growth, the primary effect of the loan guarantees is to create an unlevel playing field that hurts the small businesses that do not apply for SBA loans.

At the conclusion of the 2006 Small Business Week, AEI economist de Rugy demonstrates that the SBA’s loan guarantees are not an effective way to help small businesses flourish. In fact, the program may do more harm than good, as it imposes costs on taxpayers and favors a tiny number of small businesses at the expense of all others.

Véronique de Rugy concludes that the SBA’s loan guarantee program should be abolished. Instead of using preferential policies, the government can best help small business--and other segments of the economy--by creating an environment conducive to productive behavior. This means low tax rates, low levels of regulation, and a stable legal structure that protects property rights.

Véronique de Rugy is available for interviews, and can be contacted at 202.862.7165 or vderugy@aei.org.

Please click here to read the full SBA loan study.

For additional media inquiries, please contact Véronique Rodman at vrodman@aei.org or 202.862.4871.

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