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...policy objective the Small Business Administration (SBA) loan-guarantee program. Using panel data set of SBA-guaranteed loans, we assess whether or not SBA-guaranteed lending has an observable impact on local economic performance. We find a positive and significant (although economically small) relationship between the relative levels of SBA-guaranteed lending in a local market and the future per capita income growth in that market.
Introduction
The essence of the American economic system of private enterprise is
free competition. Only through full and free competition can free
markets, free entry into business, and opportunities for the
expression and growth of personal initiative and individual judgment
be assured. The preservation and expansion of such competition is not
only to the economic well-being but to the security of this Nation.
Such security and well-being cannot be realized unless the actual and
potential capacity of small business is encouraged and developed. It
is the declared policy of the Congress that the Government should aid,
counsel, assist, and protect insofar as is possible the interests of
small-business concerns in order to preserve free competitive
enterprise, to insure that a fair proportion of the total purchases
and contracts for supplies and services for the Government be placed
with small-business enterprises, and to maintain and strengthen the
overall economy of the Nation. (1)
The promotion of small businesses is a cornerstone of economic policy for a large number of industrialized countries. Public support for small enterprise appears to be based on the widely held perception that the small business sector is an incubator of economic growth, a place where innovation takes place and new ideas become economically viable business enterprises. In addition, policymakers routinely point to small businesses as important sources of employment growth--even though economic studies find little evidence to support this claim. It is not surprising, then, that there is widespread political support for government programs, tax breaks, and other subsidies aimed at encouraging the growth and development of small businesses in the United States, and increasingly, around the world.
A particular area of concern for policymakers is whether or not small businesses have access to adequate credit. After all, a lot of small firms are relatively young and have little or no credit history. Lenders may also be reluctant to fund small firms with new and innovative products because of the difficulty associated with evaluating the risk of such products. These difficulties are classic information problems--problems obtaining sufficient information about the parties involved in a transaction--and they may prevent otherwise creditworthy firms from obtaining credit. If information problems are substantial, they can lead to credit rationing, that is, loans are allocated by some mechanism other than price. If small businesses face credit rationing, the next Google, Microsoft, or Starbucks might wither on the vine for want of funding. To the extent that credit rationing significantly affects small business credit markets, a rationale exists for supporting small enterprises through government programs aimed at improving small business access to credit.
One specific government intervention aimed at improving the private market's allocation of credit to small enterprises is the Small Business Administration (SBA)-guaranteed lending program. SBA loan guarantees are well established, and their volume has grown over the past decade. Nearly 20 million small businesses have received direct or indirect help from one or another of the SBA's programs since 1953. The SBA's current business loan portfolio of roughly 219,000 loans is worth more than $45 billion, making it the largest single financial backer of small businesses in the United States. Over the period 1991 to 2000, the SBA assisted almost 435,000 small businesses in obtaining more than $94.6 billion in loans, more loan volume than in the entire history of the agency before 1991. No other lender in this country has been responsible for as much small business financing as the SBA has during that time (SBA 2004). These lending numbers are remarkable when one considers that SBA loan guarantees are aimed at that segment of small business borrowers that presumably would not otherwise have access to credit. It is interesting that the dramatic growth in SBA loan guarantees over the past decade has occurred at a time when advances in computer and communications technology have substantially reduced information costs in the economy. To the extent that technological innovation has improved the information efficiency of credit markets--especially small business credit markets--this increase in SBA-guaranteed lending has occurred at a time when the benefits of SBA guarantees should be declining.
The rationale for SBA guarantees appears to be that credit market imperfections can result in small enterprises being credit rationed--particularly for longer-term loans for purposes such as capital expansion. If SBA loan guarantees indeed reduce credit rationing in the markets for small business loans, then there should be a relationship between measures of SBA activities and economic growth. And, this is what we find. In particular, we find a positive (although small) and significant relationship between the level of SBA lending in a market and future income growth in that market. Overall, our empirical results are consistent with a positive social welfare impact of SBA-guaranteed lending.
The remainder of the paper is organized as follows. First is provided a brief review of the academic literature on credit rationing and relationship lending. This literature is consistent with the hypothesis that information problems in lending markets are particularly severe in the small enterprise credit market and, hence, provides a rationale for SBA loan guarantees. An overview of SBA lending programs is then presented, after which, the data, hypotheses and empirical strategy are outlined. The results follow, along with conclusions and future research questions.
The Economics of Credit Markets
The economic justification for any government-sponsored small business lending program or loan guarantee program must rest on a generally acknowledged failure of the private sector to allocate loans efficiently. Absent such a clearly identified problem with private sector lending to small businesses, the SBA's activities would simply seem a wasteful, politically motivated subsidy to this sector of the economy.
Many economists, most notably Stiglitz and Weiss (1981), contend that private lending institutions may indeed fail to allocate loans efficiently because of fundamental information problems in the market for small business loans. These information problems may be so severe that they lead to credit rationing and constitute the failure of the credit market. Stiglitz and Weiss (1981) argue that banks consider both the interest rate they receive on the loan and the riskiness of the loan when deciding to make a loan. But the lack of perfect information in loan markets may cause two effects that...
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