American University
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SBA lending equity and efficiency challenges

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posted on 2023-08-05, 11:16 authored by Derek HyraDerek Hyra, Meghan Doughty

America’s small businesses are important drivers of the national economy and job creation. Small firms employ half of the United States (U.S.) labor force and since 1995 small businesses have provided approximately 65 percent of net new jobs in the American economy. Moreover, since the Great Recession small businesses have contributed to a significant proportion of American job recovery (Mills and McCarthy, 2014). While small businesses are vital to the American economy, it is often difficult for lenders to determine the credit worthiness of these types of businesses (Craig, Jackson and Thomson, 2007). To help stimulate lending to small businesses, in 1953 Congress created the U.S. Small Business Administration (SBA) to facilitate the deployment of credit to small firms. Two cornerstone SBA efforts have been the 7(a) and 504 loan guaranteed programs.1 These programs minimize risk by providing federal guarantees, ranging from 40 percent to 75 percent of the origination amount, on loans made by private lenders. These programs have been critical in facilitating loans to America’s small businesses. Without these programs many small businesses might not have otherwise received loans on reasonable terms. Since 2009, these programs have deployed over $122 billion in small business credit combined. In the 21st century the SBA loan guaranteed programs face two challenges: equity and efficiency. Since the end of the Great Recession, the proportion of loans to African Americans has declined, while loan volume has increased. Some in the mainstream media claim that African American small firms are missing out on America’s economic recovery. Additionally, there is a scholarly debate as to whether SBA lending provides economic benefits to areas. Some studies suggest that SBA lending is positively associated with economic growth and employment, while others point to a negative association. This white paper explores some of the equity and efficiency concerns associated with the SBA lending programs and provides recommendations to increase the portion of government guaranteed loans going to African Americans and presents research ideas to further investigate the relationship between SBA lending and local economic growth.



American University (Washington, D.C.)


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