October 5, 2022

Are Direct Loans from the Small Business Administration a Bad Idea?

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

With all the news about President Obama’s proposals to increase bank lending to small business, there’s one obvious question that needs to be addressed: Why not have the Small Business Administration take a more aggressive role? Why not allow the agency to lend directly to small businesses?

The issue came up at a recent hearing held by the House Financial Services and Small Business Committees.

Turns out, the Small Business Act creating the SBA allows the agency to do direct financing of companies, as the You’re the Boss blog recently pointed out. And through at least the 1980’s, they did so, lending to companies rejected by banks.


Plus, in the past year, the Senate has introduced legislation to help the SBA make direct loans. And the House has passed two bills creating programs aimed at direct lending. That legislation would create a program which would exist only in a recession, through which the SBA would help small businesses fill out loan applications. Then, if no bank were willing to lend, the agency would step in.

But the Obama administration is against any and all such proposals. The reasons: 1) The agency doesn’t have the staff or the resources; 2) It would take as long as a year to get such a program up and running; 3) Administrative costs would be in the billions of dollars; and 4) Historically, SBA direct loans have had higher cumulative loss rates than other SBA-backed loans.

Those, in fact, are pretty convincing arguments.

It might just be that, while it sounds good on paper to give the SBA the power to lend directly, the reality is very different. Sure, drastic action is needed to increase bank lending. But this one might be thoroughly impractical.

The bottom line: Ultimately, it’s bankers who probably are more qualified than anyone at the SBA to make these decisions. In a time of scarce government resources and a need for fast action, the most efficient approach is for the SBA to do whatever it can to encourage banks to lend.

Of course, whether the steps proposed by the Obama administration are likely to do that is the $64,000 question.

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

With all the news about President Obama’s proposals to increase bank lending to small business, there’s one obvious question that needs to be addressed: Why not have the Small Business Administration take a more aggressive role? Why not allow the agency to lend directly to small businesses?

The issue came up at a recent hearing held by the House Financial Services and Small Business Committees.

Turns out, the Small Business Act creating the SBA allows the agency to do direct financing of companies, as the You’re the Boss blog recently pointed out. And through at least the 1980’s, they did so, lending to companies rejected by banks.


Plus, in the past year, the Senate has introduced legislation to help the SBA make direct loans. And the House has passed two bills creating programs aimed at direct lending. That legislation would create a program which would exist only in a recession, through which the SBA would help small businesses fill out loan applications. Then, if no bank were willing to lend, the agency would step in.

But the Obama administration is against any and all such proposals. The reasons: 1) The agency doesn’t have the staff or the resources; 2) It would take as long as a year to get such a program up and running; 3) Administrative costs would be in the billions of dollars; and 4) Historically, SBA direct loans have had higher cumulative loss rates than other SBA-backed loans.

Those, in fact, are pretty convincing arguments.

It might just be that, while it sounds good on paper to give the SBA the power to lend directly, the reality is very different. Sure, drastic action is needed to increase bank lending. But this one might be thoroughly impractical.

The bottom line: Ultimately, it’s bankers who probably are more qualified than anyone at the SBA to make these decisions. In a time of scarce government resources and a need for fast action, the most efficient approach is for the SBA to do whatever it can to encourage banks to lend.

Of course, whether the steps proposed by the Obama administration are likely to do that is the $64,000 question.

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