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Do SBA Guarantees Increase Net Lending?

Posted by: John Tozzi on March 1, 2010

Reuters’ Felix Salmon raises a good question at the end of a post about whether governments can actually sway banks to lend more. He writes:

[W]hen the government guarantees loans, for instance through the Small Business Administration, that might do more to help increase lending — but only by transferring credit risk out of the banking sector and onto the taxpayer. And it might in fact just move lending activity into the small-business area from elsewhere in the bank, without increasing the total amount of credit that the bank makes available. It would be great to see some empirical studies on such matters.

Do banks take money they would lend anyway and channel it through SBA programs to reduce their risk through guarantees? SBA-guaranteed loans have interest rates capped (details here), and bankers I’ve interviewed generally don’t regard SBA lending as particularly profitable. The loans take more time to underwrite (because of the documentation needed for the guarantee) for relatively small-dollar amounts. But Salmon’s question is interesting. Can any loan officers or others reading shed some light?

Reader Comments

Doug Carleton

March 2, 2010 2:19 PM

I will give you a thought. Felix does raise a legitimate question. I have been involved in SBA lending since 1994. Moving the credit around in the bank and thus not increasing the amount of credit available is wrong. Much of the money that has been loaned out in the last several months after the SBA guarantee was increased from 75 to 90% would not have gone out of any department in the bank as new credit, so it was new money. If you look at stories from all over the country, which I do every day with a Google feed, the volume of SBA loans took an enormous jump. That was not a wash.

In regards to Felix's comment about switching the burden from the bank to the taxpayer, technically he is exactly right. But, if you take an SBA default rate of 10% for example, 10% of that loss is borne by taxpayers (and it is nowhere near that because of SBA liquidation requirements, much too long to go into here). So 90% got to the market where it was needed. Did it create new jobs or save them? Did it generate new sales taxes from sales for strapped states that might not have been made otherwise? Did it maybe even gain some new customers for the banks?

There is plenty more, but my point is that what you might lose on 1 out of 10 is far outweighed by the other 9, and a lot of those 9 might not have done it without SBA.


May 17, 2011 8:50 AM

My clients tell me that without the SBA guaranty, they would not be able to offer SBA loans as they have been protecting capital. Just recently they have opened the credit spigot but without a SBA guaranty, they would not make the loan. They do complain about smaller profit margins versus the fees and interest rate they can charge even with assuming a small risk of 25% of the loan amount. I have one lender that is looking for a green-type loan product but unfortunately SBA has nothing to offer lenders or small businesses.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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