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United States Small Business Administration

RS Number 140

December 1993

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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