United States Small Business Administration

RS Number 140

December 1993

Purpose

Do Small Business Administration loan guarantees improve access to capital for high risk small businesses? One objective of loan guarantees provided by the SBA is to improve small business access to capital by correcting inefficiencies in the financial market for small firms. The purpose of this study was to compare SBA borrowers with other borrowers and to assess why lenders recommend SBA loan guarantees.

The study also provides some data on the effectiveness of the SBA loan guarantee program in addressing market failures caused by financial market concentration (market power held by lenders).

The research is the result of a contract between the SBA and George W. Haynes who, in the course of preparing his Ph.D. dissertation, conducted an analysis of data from the National Survey of Small Business Finances. The dissertation, entitled "A Qualitative Assessment of the Small Business Administration Loan Guarantee Program's Influence on the Effects of Financial Market Concentration," was submitted to the Graduate School of Cornell University in August 1993. A short paper entitled "A Comparison of Borrowers with SBA and Other Loan Guarantees" also was prepared for the Office of Advocacy.

Scope and Methodology

The study used the newly available data on small business borrowing from the National Survey of Small Business Finances (NSSBF), which is sponsored by the Federal Reserve Board and the SBA, to compare financial characteristics of SBA borrowers with non-SBA borrowers. (The NSSBF included a special sample of 400 SBA borrowers receiving loans in 1986.) A weighting scheme was used to combine the SBA and main population components.

Formal statistical analyses, using non-linear logit and probit regression algorithms, were performed to examine the statistical significance of several variables.

Highlights

The study contains several conclusions regarding the existing SBA loan guarantee program.

Overall, high-risk small business borrowers have a higher probability of receiving an SBA loan guarantee than low-risk small business borrowers. The pricing scheme of the SBA loan guarantee program does not vary with the "quality" of the borrower-that is, high-risk borrowers are not charged higher fees than low-risk borrowers. Therefore, the program provides a built-in incentive for lenders to lend to high-risk borrowers. The program automatically improves access to SBA loan guarantees for high-risk small business borrowers.

The empirical testing conclusively supports the goal of allocating more financial capital to high-risk small businesses by suggesting that lenders are provided with an attractive alternative to personal loan guarantees for high-risk borrowers.

However, small business borrowers in highly concentrated financial markets-markets in which a small group of commercial lenders controls the market-do not have a higher probability of receiving an SBA loan guarantee than other borrowers.

High-risk small business borrowers in highly concentrated markets also do not have a higher probability of receiving an SBA loan guarantee than other borrowers.

The dissertation notes that in 1985, about 75 percent of U.S. commercial banks participated in the SBA loan guarantee program, but only 19 percent of these banks participated in nearly 70 percent of loan guarantees outstanding. If the approval rate on SBA loan guarantees is high and the participation rate by lenders is relatively low, a relevant question may be which lenders, rather than which borrowers, participate in the loan guarantee program.

For more information, contact Advocacy's Office of Information at (202) 205-6531.

Ordering Information

The complete report is available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22261

(800) 553-6847

Ordering number: PB94-126885

Cost: Pending

*Last Modified 6-11-01