businesses (usually defined as companies with 500 or fewer employees) are an
important part of the nation’s economy. At various times during the
business cycle, concern is voiced about the difficulties that small
businesses have obtaining loans. There can be many reasons for periodic declines
in small business lending over the business cycle: loan standards change, the
quality of projects to be financed changes, and small businesses’ demand
for loans fluctuates with anticipated customer demand.
Congress created the Small Business Administration (SBA) to assist small
businesses in many ways, including by guaranteeing loans made by the
private sector. This guarantee reduces a lender’s potential loss on a
small business loan and should make lenders look more favorably on small
business loan requests. Nevertheless, there are several reasons why the volume
of small business loans varies over time despite the availability of the
The business cycle’s impact on the volume of SBA guarantees is not clear. When
the economy is growing, demand for SBA loan guarantees can increase as
small business expands to take advantage of opportunities or small
businesses might reduce their demand because they can obtain loans without
the SBA’s guarantee. In an expanding ecomomy, lenders are more willing to make
loans on more favorable terms.
In slowdowns, concern over potential losses leads lenders to tighten all loan
standards, perhaps affecting small businesses disproportionately. The
demand for SBA loan guarantees can increase as small businesses are unable
to obtain loans without the government’s backing or interest in SBA loan
guarantees can fall because there are fewer reasons to borrow. Even with an SBA guarantee,
small business owners frequently pledge their personal residences as collateral
for business loans. During the 2007-2009 recession, the widespread decline
in home prices reduced owners’ abilities to provide such credit
enhancement. The ultimate impact of these factors on SBA loan volume,
which work in opposite directions, cannot, however, be predicted with confidence.
This report analyzes reasons used to justify government intervention in small
business lending and discusses how making the proper analysis of problems
improves the policy outcome. For program information on SBA loan
guarantees, see CRS Report R41146, Small Business Administration 7(a)
Loan Guaranty Program, by Robert Jay Dilger and CRS Report R41184, Small
Business Administration 504/CDC Loan Guaranty Program, by Robert Jay Dilger.
This report also identifies some sources of information about the
condition of the small business loan market.
Date of Report: January 8, 2013
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