Terminating The Small Business Administration

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Veronique de Rugy on ^* and Tad DeHaven

August 2011

Summary
A brief history of the SBA
Loan Guarantee
Myths of credit is not available
SBA's irrelevance
Banking on the SBA
Conclusion

Small Business Administration (SBA) was created in 1953 by the Small Business Act. ¹ The main purpose of the SBA, through government loan guarantees, is to encourage lending to small businesses. Other activities of the SBA to provide direct loans for disaster recovery, including help to win government contracts with small businesses.

The SBA, in 2011 will cost taxpayers about $ 6.2 billion. ² is typical annual spending nearly $ 1 billion, SBA has imposed higher costs to taxpayers, and in recent years has suffered more than the usual loss of the guaranteed loan. The SBA will guarantee nearly $ 24 billion in new loans in 2011. See Also free money instantly online . ³ Share of SBA guaranteed loans outstanding - the taxpayer on the hook for the federal government and ultimately, is approximately $ 70 billion that. Check out also great payday loan companies . ^Four

Over 99.7 percent of all U.S. businesses, the SBA "Small" is assumed. ⁵ Congressional Research Bureau, these businesses are gross domestic product (GDP) has been calculated to account for about half of the employment. ⁶ is a major economic impact, bipartisan support for government subsidies to encourage small business, unfortunately. Check out also guaranteed payday uk . ^Seven

Areas of interest to policy makers is whether to have sufficient access to credit for SMEs. Check out also guaranteed 1500 installment loans lenders . Growing companies that need capital but, small businesses, if there is little credit history may have difficulty in getting loans. It is possible to measure the success of precisely such companies may be difficult because lenders are also loans to companies may be small and relatively young reluctant. See Also goshen lenders .

These factors are cited by policy makers to justify government intervention in the credit markets to help small businesses. Policy makers such as market-driven lending to deny credit to worthy small businesses, claiming that they are on a mission of the Small Business Administration and fix this alleged "market failures. "

In this essay, because the federal government to support SMEs, challenging the belief that there is a need to intervene in credit markets. It is to justify the loan programs SBA "market failure" and concluded that there is no. The SBA, will benefit a relatively small number of SMEs at the expense of the majority of SMEs do not receive government support. SBA's grant also represents a form of corporate welfare for the banking industry.

Small Business Administration, the Depression-era Reconstruction Finance Corporation lent money to financially distressed banks and companies, was founded in 1953 after the collapse of the. RFC has lost support after allegations of influence peddling during the Truman administration. President Dwight Eisenhower, in principle, but opposed the creation of the SBA, he signed into law a politically expedient way to counter the criticism that the Republicans had received indebted to "the big companies."

Because it was either ambivalent or opposed to the interest groups that are intended to benefit, as an example of government intervention, the creation of SBA's atypical. American Chamber of Commerce, National Association of Manufacturers, and American Bankers Association, opposed the federal government's involvement in business loans. Indeed, support for creating the SBA had been limited to the politicians of both the business community saw an opportunity to tempt small unorganized mainly active in political support.

The SBA then seeds were planted, it grew. The SBA loan, and its staff quadrupled between 1954 and 1960, jumped to an employee of 2200-550. Check out also guaranteed loan approval lenders . ⁸ In 1958, Eisenhower's Budget Office, warned that there was an SBA, "uncontrollable programs," but the parties, they "would like to inform you that have supported the little fellow directly below. See Also get quick cash . " ⁹ In addition, members of Congress enjoyed using the SBA and to distribute the money to members of their convenience. Project members are sometimes given "small" or to declare a component of an athlete, "in no less. Check out also free online loan ." Rely on the agency because it was declared ¹⁰

For the Mafia in the 1970s and 1960s "front" of numerous scandals and failures, including the use SBA loans reported on the government to establish a company, which was marked by. ¹¹ In the mid-1970s, the agency, the nickname "scandal had gained control of the small." ¹²

SBA has also led to many abuses, "the affirmative action" became one of the chief instruments of government to pursue. Previous governments are using the SBA direct loans and federal contracts to minority-owned businesses. See Also get a check advance . Is a laudable goal to eradicate discrimination, SBA's contract set episode has bred corruption and corruption instead. For example, President Ronald Reagan, set - supported the expansion of SBA's federal contracts to minority-owned businesses. See Also get a check advance episode. Its decision to support a corrupt defense contractor had obtained the contract through the SBA's episode set a few government officials deliberately incorrect "scandal Wedtech" contributed to. ¹³

In his second term, Reagan's budget director for him to abolish the SBA, supporting the efforts of David Stockman. Stockman, while distorting credit markets, small businesses will benefit some "waste billions of dollars - Rat Hole," also known as the SBA. See Also guaranteed 350 loan . ¹⁴ However, the SBA committee saved two small business-led Congress. When most business lobby group, the abolition of the SBA, supporting either had or ambivalent towards.

However, the banking industry, despite the agency was opposed to the creation of the 1950s originally had been a major proponent of the SBA. Changes in the banking industry of the heart, in order to guarantee bank loans issued to companies, due to the shift from the SBA's direct business loans. The SBA guaranteed loans, mainly, is highly profitable for banks and their risk-free. Today, the bank's lobby, congressional committees that SBA small business its main focus, as is strongly supportive of the agency.

Congress increased the power of the Republican platform in the election year 1994 small government did not convert to a serious threat to SBA. Indeed, SBA is prosperous under Republican congressional budget in the 1990s with President Clinton. See Also great online pay day loan . In 2000, President Clinton proposed a budget that was approved at the level of small business loans about five times higher than when Reagan left office. ¹⁵

Despite several skirmishes and small business committees of Congress on the issue of funding a minor, the Bush administration, which supports the SBA, the loan amount was increased further. Interestingly, President Bush's fiscal 2003 budget proposal acknowledges: "Historically, the SBA loan program provides a one-tenth of one percent of small businesses across the country each year, the annual small business loans providing less than 1% of the " ¹⁶ economic importance to the entire effort was recognized by the administrative agency, yet it spends taxpayers' money supports it yet.

In 2009, President Obama, as part of his failed attempts to stimulate the sluggish economy, employing loan programs SBA. American Recovery and Reinvestment Act of that year increased the percentage of SBA's loan guarantee up to 90% temporarily, it will cover the cost of the borrower and lender fees. ¹⁷ These provisions, but was extended twice in subsequent legislation expired in 2011.

7 of the SBA () loan guarantee program is the agency's flagship lending program. Under the program, the government lend directly to businesses rather than to back up the loans issued by private financial institutions. ¹⁸ An applicant must be a commercial company must be able to demonstrate the ability to repay the loan, and "small" business must be. Under the definition of the SBA, is considered less than 99. Check out also guaranteed installment unsecured loans .7 percent of all U.S. companies. ¹⁹

7 () program that exports are "ill" and those located in rural areas, including those that are affected negatively by the North American Free Trade Agreement and the favorable given company, focused support are included. The SBA also has a microloan program for small loans for short periods, it will execute the program to back up CDC/504 purchase long-term financing for major fixed assets of the business.

The SBA provides loan guarantees issued by private financial institutions up to 85% loss in the event of default of its loan recipients. The SBA, so ultimately most responsible for any loss as a result of the guarantee, lenders to lend money to high risk applicants, are more willing. To offset the cost of the loan programs SBA, SBA charges, and expenses for each loan guarantee approval of the lender, service fee. These fees are fees that are higher than commercial loans, SBA loans have repayment periods longer than most commercial loans and easy credit conditions.

SBA is supposed to charge enough to not require the annual budget from Congress. But it is not the case, and the program has continued to rely on taxpayer subsidies. SBA economic downturn in 2009 was $ 3.9 billion in 2010 and $ 48 billion of debt default forced to increase the purchase of defaulted guaranteed loans from the proceeds of $ 1.0 billion in 2006 and 2007 led to an increase. ²⁰ additional costs in recent years as Congress has been hit by a taxpayer is accustomed to pass the increase on several loans small business loans for the purpose of goose.

7 () The purpose of the program, "the reputation of others." In order to provide small businesses can not get loans, the lender is to encourage ²¹ other credit only literally sounds like the SBA loan the borrower can not get to go to the law is "to define the trust. In other reasonable terms and conditions, availability of credit from non-federal sources" and "." ²² The definition of discretionary Many, and that it provides an audit, to clarify that to get a loan is not subsidized from many companies bank's loan SBA.

That the report of a recent Government Accountability Office found that lenders were sampled three minutes, "the testing of resources and personal credit elsewhere requirement to document the borrower fails to be consistent meet. " ^twenty-three GAO is about 20% of the lenders that provided the documentation that comes, "they note the instructions provided by the lender that the borrower is unable to obtain other credit reasonably general In particular sufficient to support a conclusion that was not. " ²⁴

After providing preliminary evidence can not get private lenders to finance it under "reasonable terms," the applicant can apply for a loan guaranteed by SBA. After reviewing the bank's application, SBA determines whether a company to get a loan. 7 of the SBA () preferred lender under the program, and a final loan decision, most of the responsibility of the service will be handled by the lender.

According to the Inspector General of the SBA, "Over 68 percent dollar loan guaranteed by SBA, the lender has been made with limited supervision and delegation of authority. Check out also gov. no pay back loans ." ²⁵ director of the SBA's inspector general repeatedly lender deficiencies found. "SBA's 7 high-risk lenders now (), accounting for more than 80% of the outstanding portfolio." Ominously named inspector general's notes ²⁶

Outsourcing decisions and the SBA loan guarantee to a lender that has it's inspector general, the 7 (a) that identifies fraud and longstanding problems in the program is not surprising.

Over 10 years, the OIG study, 7 paid by the agent or other loan packagers () revealed a pattern of fraudulent business loan guarantee program. See Also guaranteed payout of loan . Fraudulent schemes, which included several hundred million dollars, director of SBA's loan agents still putting taxpayer dollars at risk, are limited. ²⁷

Inspector general's audit ", was devoid of ability to repay ineligible, did not provide the support needed to run or loans." Loan to the borrower was "a high percentage" has identified ²⁸

Inspectors also, SBA is "not to pursue the recovery of improper payments aggressively." And stated that ²⁹ To make matters worse, SBA is understating the problem of improper payments by its deliberate appear to be. For example, SBA has reported improper payment rate of 0.53% and 2008, inspector general's audit is found that it actually is 27 percent. Check out also goldstar cash loans . ³⁰ The audit figures called SBA "statistically valid" credit quality of borrowers said that such a resulting high rate of improper payments and repayment ability, including documents relating to eligibility issues, and from the failure of agencies to verify.

Figure 7 shows the SBA (a) loan guarantee program is too theoretical for some small businesses by private financial institutions sufficient confidence that hinder business growth and job creation, assuming that the negative suffering. SBA loans, by inducing lenders to support small businesses that they otherwise refuse to guarantee the attempt to solve this alleged problem.

In order to provide sufficient credit, the most cited cause of market failure is assumed asymmetric information between borrowers and lenders. ³¹ According to theory, banks can not distinguish between high risk and low-risk borrowers may exceed the demand for credit. Supply. Denied loans to companies particularly valuable in this way instead of interest rate increases, increasing the price of bank loans by credit rationing only.

However, in his own private capital markets, information asymmetry between borrowers and lenders did not provide proof that not enough credit. In fact, capital markets, has developed an effective solution for private information to fill the gap.

One mechanism has emerged to address the problem of information in capital markets is the development of "relationship lending." Lenders are less likely to ration credit to borrowers and lenders have a history of . When evaluating a client that was established by cutting the lenders involved in the middle, as well as the creditworthiness of the client immediately, do not consider the possibility of lost profits.

Lending relationships, you can accumulate the information the lender. Repeated interaction with the client for different purposes, the financial information for the lender and the client's character "soft information", including both the information about the creditworthiness of the client, giving. This accumulation of information, to reduce the risk of lending and increase credit availability. See Also getaloanfaster co uk .

Other market mechanisms to reduce the problem of information is credit scoring. Financial information provided by the applicant's credit is used to generate a numerical score that provides a strong indication of the applicant's tendency to become delinquent or default of the loan. In addition to scoring, significantly reducing the cost of a credit information collection, however, by improving the ability to predict bank default, bank lending helps to more effective decision making.

Evidence, credit scoring, which suggests that increasing the availability of credit to SMEs. For example, Allen Berger, Scott Frame, and the study by Nathan Miller, Credit scoring was found to increase the availability of credit for high-risk borrowers. ³² lenders, their borrowers are simply to compensate for the risk they represent, must pay the higher interest rates on their loans.

Growing body of research, credit rationing occurs, small businesses have difficulty challenging the belief that it is able to get the capital:

• David de Meza and David Webb not economists are reluctant to lend money to small businesses outside of SBA's programs the bank has announced several studies indicate that there. ³³
• A study by Kristen Willard and Alec Levenson is not, while they have the right to unrestricted access to credit and affordable small businesses of all government intervention is necessary in order to facilitate the formation of small businesses It was found that there is no evidence that. See Also free short term loans . ³⁴
• Federal Reserve Board's report to Congress on the availability of credit to small businesses, small business financing needs in 2002 suggests that a healthy relationship between supply and demand for funding closely the pattern of growth of debt during the year 2007, showed that track. ³⁵
• Studies reviewed by the Government Accountability Office, access to credit for functions, and found some differences between different groups. See Also guaranteed cash advance loans . However, evidence that inequality is a result of discrimination is "conclusive" was. ³⁶
• From the National Federation of Independent Business survey is found to be more concerned about taxes and government regulation of credit availability for SMEs than repetition. Not even during the recent recession, their "single most important issue," a mere single-digit share of SME financing as reported. ³⁷

Bank lending is also important to note that one of the many ways for small businesses to obtain financing. For example, the use of credit cards by small businesses increased by 70% from 1998-83 percent in 2009. Check out also get business loan . ³⁸ Use of credit cards that are created for small businesses, provide evidence of the private sector's ability to target the needs of small businesses increased by 64% from 37% during that period.

Elizabeth A. Duke of Federal Reserve Board, recently, the majority noted that small businesses are starting to raise funds from personal savings and assets.

These small, emerging companies to run is started with personal savings and assets more than 70%, about 3 percent to about 6%, was initiated using a personal loan from a bank or savings institution Start by using your personal information and credit card business, was started using a business loan from a bank or savings institution just 3%. Smaller percentage of small businesses start, credit unions, other organizations appear to have received funding from investors or. In short, our survey data, which suggests that the most important funding source for the formation of personal resources, SME entrepreneurs. ³⁹

As a consequence, policy makers interested in enhancing the formation of small businesses rather than trying to improve the credit markets rather unnecessary micromanagement, policies should focus on contributing to the savings and investment in general is that.

Only a small share of small business, please start a loan from commercial lenders. In addition, loans issued by commercial banks are backed by the SBA, we represent a very small share of total commercial loans to small businesses. See Also get a loan . The GAO, SBA 7 () has been calculated that only accounts for a little over 1% of total loans outstanding small business loans. ⁴⁰

Table 1 shows the top 15 industries most SBA guaranteed loan. 10 years. ⁴¹ These industries, constituting only 0.5% of small businesses receiving loans backed by the SBA. Thus, rather than help small businesses compete with large companies rather SBA's loan guarantee will help small businesses compete with other small businesses mainly small percentage. See Also fresno installment loans .

Table 1. Top 15 Industry's loan SBA, the average loan data, from 2001 to 2010

Industry	Number of SBA loans per year	SBA loan failure rate	A small number of business and industry	SBA Loan Ratio
Full Service Restaurant	3414	23.3 percent	195 163	1.7 percent
Limited Service Restaurant	2529	25.2 percent	145 189	1.7 percent
General Automotive Repair	1107	18.8%	196 672	0.6 percent
W / gas station stores	1066	17.3 percent	52 795	2.0 percent
Beauty salon	1066	21.6 percent	582 976	0.2 percent
Dental Offices	1041	5.6 percent	154 254	0.7 percent
Hotels and motels	938	7.0 percent	65 586	1.4 percent
The physician's office	934	7.5 percent	327 626	0.3 percent
Landscaping Services	891	19.1 percent	377 431	0.2 percent
Child Day Care Services	824	15.3 percent	749 647	0.1 percent
Offices of Chiropractors	731	14.6 percent	57 738	1.3 percent
Other professional traders	688	21.8 percent	N / A	N / A
Other stores and other retailers	675	26.6 percent	96 115	0.7 percent
General freight, local	631	26.6 percent	214 140	0.3 percent
Offices of lawyers	625	10.1 percent	386 258	0.2 percent
Total top 15 industries	17 159	17.4 percent	3601590	0.5 percent
Total all industries	67 555	19.4 percent	28255244	0.2 percent

Looking at Table 1, it will most benefit from industry SBA guaranteed loan no reason to justify the special attention from the government is not clear. Check out also give me money for free . These industries such as restaurants, are characterized by strong competition and a number of companies. Such market failure is not apparent. In addition, restaurant, beauty salon, children's nursery, and most of the other businesses to meet the credit needs of the market without subsidies SBA. Small businesses, giving advantage to a subset of favorable credit markets are unnecessary federal interference with economic injustice.

Small business prospects and sound and solid business plan, you should be able to raise debt and equity private means. SMEs are unlikely prospect if they have the financial and unstable economically because it wasted, when it denied private capital, it would be appropriate. Check out also guaranteed payday loan uk . In fact, SBA are shown in Table 1 - rate mortgage loan debacle, the government intervention in credit markets, shows that misallocate capital toward the ends often wasted.

The SBA guaranteed loan, a small number of companies will benefit in favor of no good economic reason. Banking industry: But politically, SBA programs benefit the powerful special interests. Check out also guaranteed qualify loans direct lender . Banking industry, the federal government originally, should be involved in commercial lending because they do not, that is opposed to the establishment of the SBA. However, when switched to backing private loans issued by financial institutions from lending directly to SBA, the banking industry has become a leading proponent of the SBA.

Benefits of SBA's loan programs in the banking industry in several ways. First, small business defaults on SBA's obligation to repay the loan when the bank does not bear the bulk of the costs. Thus, even though the SBA borrowers are riskier than other borrowers, the bank's exposure can be only 15% of the value of the loan. See Also green dot loan .

Second, small business loans backed by the SBA, the bank is profitable. Check out also free quick payday loan . () Guaranteed Loan Program, we can be profitable in a 7 "in congressional testimony that it finds (the National Association of Government Guaranteed Lenders, a trade organization that is composed primarily of financial institutions participating in the 7 ( NAGGL), our president if done correctly so that a conventional loan) loan program. " ⁴²

Third, the secondary market for SBA programs, while improving its lending capacity, allowing lenders to reduce the risk further. Check out also guaranteed payday loans phone numbers . Lenders can sell trust certificates to investors and pools the guaranteed portion of SBA loans. In other words, the guaranteed portion of bank loans "securitized" can be. The SBA will guarantee the payment to be paid on time for trust certificates. Lenders are not charged a fee for the guarantee market. Loan only if it is sold in more than 110% of principal balance, half of the excess is paid to SBA.

NAGGL is a significant 70% higher return on equity for the loan of SBA, has confirmed that it can be exceeded. ⁴³ , the recipient of these revenues Who is? As shown in Table 2, a total of 2600 lenders from the top 10 financial institutions, SBA 7 in the year 2009 (a) accounts for nearly one quarter of the amount of the loan program. See Also get payday loans saturday . ⁴⁴

Table 2. SBA 7 (a) loan lenders Volume, 2009

Lenders	Loans are approved	Share
Top 5	$ 1416012582	15.2 percent
Top 10	$ 2102539282	22.6 percent
Top 25	$ 3303832757	35.5 percent
Top 50	$ 4296621012	46.1 percent
Top 100	$ 5340004367	57.3 percent

Wells Fargo alone a total 7 (a) accounted for 7.3% of the volume of loans. Other top 10 banks JP Morgan Chase, U.S. Bancorp, and PNC Financial Services Group, and includes. SBA's programs will draw members as a boost for small business, corporate welfare programs is some form of a major U.S. bank in practice. Banks will benefit from the program, taxpayers are responsible for the loss.

Because it is a tool for policymakers to help inform small businesses, SBA will retain political support. Check out also gaurenteed payday loans . At the same time, the agency that advocates for the SBA is to build the myth came to be equivalent to small businesses. In reality, the majority of American small businesses are thriving without government subsidies. SBA's loan programs, the majority of companies do not receive government support and taxpayers' expense, to benefit a relatively small number of companies. Check out also get unsecured loan .

Despite the absence of substantial economic benefits of SBA, the agency has been established in the political transition. It may particularly strong support from the banking industry. However, today's huge federal deficit, policy makers, including the expenditure of SBA, you need to start businesses eliminate unnecessary subsidies in the budget. See Also grant money .

By leaving the U.S. private sector business development, became the most prosperous country in the world. America's great entrepreneurial history, did not come about as a result of subsidies from Washington small businesses. The SBA is an organization that must be terminated unnecessary to reduce the deficit and end the business patronage. Federal policy makers to reduce tax and regulatory barriers to the growth of small businesses instead must focus on providing a level playing field for all companies of all sizes. See Also garaunteed pay day loans .

^* Veronique de Rugy is a senior fellow of the Mercatus Center at George Mason University, and adjunct scholar of the Cato Institute.

The authors thank Sandhya Ghai for her excellent research assistance.