Small Business: Access to Capital and Job Creation
Released: 2019-02-01T00:00:00

Small Business Access to Capital

The Small Business Administration (SBA) administers several programs to support small businesses, including venture capital programs to provide "long-term loans and equity capital to small businesses, especially those with potential for substantial job growth and economic impact" and loan guaranty programs to encourage lenders to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions." Historically, one of the justifications presented for funding the SBA's access to capital programs has been that small businesses can be at a disadvantage, compared with other businesses, when trying to obtain sufficient capital and credit. As an economist explained

Growing firms need resources, but many small firms may have a hard time obtaining loans because they are young and have little credit history. Lenders may also be reluctant to lend to small firms with innovative products because it might be difficult to collect enough reliable information to correctly estimate the risk for such products. If it's true that the lending process leaves worthy projects unfunded, some suggest that it would be good to fix this "market failure" with government programs aimed at improving small businesses' access to credit.

Congressional interest in the SBA's access to capital programs has increased in recent years, primarily because assisting small business in accessing capital is viewed as a means to enhance job creation and economic growth.

Some have argued that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small business economic growth and job creation.

Economists generally do not view job creation as a justification for providing federal assistance to small businesses. They argue that in the long term such assistance will likely reallocate jobs within the economy, not increase them. In their view, jobs arise primarily from the size of the labor force, which depends largely on population, demographics, and factors that affect the choice of home versus market production (e.g., the entry of women in the workforce). However, economic theory does suggest that increased federal spending may result in additional jobs in the short term. For example, the SBA reported in September 2010 that the $730 million in additional funding provided to the agency by P.L. 111-5 , the American Recovery and Reinvestment Act of 2009 (ARRA), created or retained 785,955 jobs.

As will be discussed, the tightening of private-sector lending standards and the disruption of credit markets in 2008 and 2009 led to increased concern in Congress that small businesses might be prevented from accessing sufficient capital to start, continue, or expand their operations—actions that were expected to lead to higher levels of employment. As the SBA indicated in its FY2010 congressional budget justification report

Over the last decade, small businesses across this country have been responsible for the majority of new private sector jobs, leaving little doubt that they are a vital engine for the nation's economic growth. However, with the United States facing the most severe economic crisis in more than 70 years, small businesses are confronted with a frozen lending market and limited access to the capital they need to survive and grow at this critical time.

Since then credit markets have improved and lending standards have moderated, but congressional concern about the economy and disagreements concerning the best means to enhance job creation and economic growth remain.

During the 111 th Congress, several laws were enacted to enhance small business access to capital. For example

P.L. 111-5 , provided the SBA an additional $730 million, including $375 million to temporarily subsidize SBA fees and increase the 7(a) loan guaranty program's maximum loan guaranty percentage from 85% on loans of $150,000 or less and 75% on loans exceeding $150,000 to 90% for all regular 7(a) loans. P.L. 111-240 , the Small Business Jobs Act of 2010, authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) ($4.0 billion was issued) to encourage community banks with less than $10 billion in assets to increase their lending to small businesses; $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs; numerous changes to the SBA's loan guaranty and contracting programs; funding to continue the fee subsidies and the 7(a) program's 90% maximum loan guaranty percentage through December 31, 2010; and about $12 billion in tax relief for small businesses (see Table A-1 in the Appendix for a list of its key provisions). P.L. 111-322 , the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorized the SBA to continue its fee subsidies and the 7(a) program's 90% maximum loan guaranty percentage through March 4, 2011, or until available funding was exhausted, which occurred on January 3, 2011.

According to the SBA, the temporary fee subsidies and 90% maximum loan guaranty for the 7(a) program "engineered a significant turnaround in SBA lending.... The end result is that the agency helped put more than $42 billion in the hands of small businesses through the Recovery Act and Jobs Act combined."

During the 112 th Congress, several bills were introduced to enhance small business access to capital through the SBA, including bills to extend the SBA's temporary fee subsidies and increase the 7(a) program's loan guaranty percentage to 90%. Congress did not adopt these legislative efforts. Instead, Congress passed legislation designed to enhance small business contracting opportunities, expand access to the SBA's surety bond guarantee program, amend the SBA's size standard practices, require a review and reassessment of the federal procurement small business goaling program, and expand small business mentor-protégé programs. Congress also adopted the Jumpstart Our Business Startups Act ( P.L. 112-106 ) that established a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding (discussed later).

During the 113 th Congress, P.L. 113-76 , the Consolidated Appropriations Act, 2014, increased the SBA's Small Business Investment Company (SBIC) venture capital program's authorization amount to $4 billion from $3 billion as a means to provide small businesses additional access to venture capital.

During the 114 th Congress

P.L. 114-38 , the Veterans Entrepreneurship Act of 2015, authorized and made permanent the SBA's waiving of the SBAExpress loan program's one-time, up-front loan guaranty fee for veterans (and their spouse). The act also increased the 7(a) loan program's FY2015 authorization limit from $18.75 billion to $23.5 billion; and P.L. 114-113 , the Consolidated Appropriations Act, 2016, expanded the projects eligible for refinancing under the 504/CDC loan guaranty program in any fiscal year in which the refinancing program and the 504/CDC program as a whole do not have credit subsidy costs; generally limited refinancing under this provision to no more than 50% of the dollars loaned under the 504/CDC program during the previous fiscal year; and increased the SBIC program's family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million. The act also increased the 7(a) loan program's authorization limit to $26.5 billion for FY2016.

During the 115 th Congress

P.L. 115-31 , the Consolidated Appropriations Act, 2017, increased the 7(a) program's authorization limit to $27.5 billion for FY2017 and P.L. 115-141 , the Consolidated Appropriations Act, 2018, increased the 7(a) program's authorization limit to $29.0 billion for FY2018.

This report addresses a core issue facing the 116 th Congress: What, if any, additional action should the federal government take to enhance small business access to capital? It discusses the role of small business in job creation and retention, provides an assessment of the supply and demand for small business loans, and discusses recently enacted laws designed to enhance small business access to capital by increasing the supply of small business loans, the demand for small business loans, or both. It also examines recent actions concerning the SBA's budget and concludes with a brief overview of three legislative options available to address small business access to capital issues during the 116 th Congress: wait-and-see, enact additional programs, or reduce and consolidate existing programs.

Two Indicators of the Supply and Demand for Private-Sector Small Business Loans

Federal Reserve Board: Surveys of Senior Loan Officers

Each quarter, the Federal Reserve Board surveys senior loan officers concerning their bank's lending practices. The survey includes a question concerning their bank's credit standards for small business loans: "Over the past three months, how have your bank's credit standards for approving applications for C&I [commercial and industrial] loans or credit lines—other than those to be used to finance mergers and acquisitions—for small firms (annual sales of less than $50 million) changed?" The senior loan officers are asked to indicate if their bank's credit standards have "Tightened considerably," "Tightened somewhat," "Remained basically unchanged," "Eased somewhat," or "Eased considerably." Subtracting the percentage of respondents reporting "Eased somewhat" and "Eased considerably" from the percentage of respondents reporting "Tightened considerably" and "Tightened somewhat" provides an indication of the market's supply of small business loans.

As shown in Figure 1 , senior loan officers reported that they generally tightened small business loan credit standards from 2007 through late 2009. Since 2009, small business credit markets have generally improved, with some tightening in 2016.

The survey also includes a question concerning the demand for small business loans: "Apart from normal seasonal variation, how has demand for C&I loans changed over the past three months for small firms (annual sales of less than $50 million)?" Senior loan officers are asked to indicate if demand was "Substantially stronger," "Moderately stronger," "About the same," "Moderately weaker," or "Substantially weaker." Subtracting the percentage of respondents reporting "Moderately weaker" and "Substantially weaker" from the percentage of respondents reporting "Substantially stronger" and "Moderately stronger" provides an indication of the market's demand for small business loans.

As shown in Figure 1 , senior loan officers reported that the demand for small business loans declined somewhat in 2007 and 2008 and declined significantly in 2009. Demand then leveled off (at a relatively reduced level) during 2010, increased somewhat during the first half of 2011, declined somewhat during the latter half of 2011, generally increased in 2012 through 2015, and has varied somewhat—increasing in some quarters and declining in others—since then.

FDIC Call Reports: Outstanding Small Business Loans

The Federal Deposit Insurance Corporation (FDIC) reports bank lending statistics on a quarterly basis drawn from the banks' Consolidated Reports of Condition and Income (Call Report). The FDIC has maintained comparable small business lending data for the second quarter (June 30) of each year since 2002. Figure 2 shows the amount of outstanding small business loans (defined by the FDIC as commercial and industrial loans of $1 million or less) for non-agricultural purposes as of June 30 of each year since 2006. As shown in Figure 2 , the amount of outstanding small business loans for non-agricultural purposes increased at a relatively steady pace from June 30, 2006, to June 30, 2008, declined over the next several years, and has increased since June 30, 2013.

Although changes in small business outstanding debt are not necessarily a result of changes in the supply of small business loans, many, including the SBA, view a decline in small business outstanding debt as a signal that small businesses might be experiencing difficulty accessing sufficient capital to enable them to lead job growth.

SBA Lending

Table 1 shows selected financial statistics for the SBA from FY2005 to FY2018. It provides an overview of the extent of the SBA's various programs to enhance small business access to capital.

The first column reports the total face value of non-disaster business loans that were disbursed by the SBA from FY2005 to FY2018. The second column indicates the number of non-disaster business loans approved by the SBA (after full cancellations) from FY2005 to FY2018. Each year, 7% to 10% of the loans approved by the SBA are subsequently canceled for a variety of reasons, typically by the borrower.

The third column reports the contract value of bonds guaranteed under the SBA's surety bond guarantee program. A surety bond is a three-party instrument between a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the contract's terms and conditions. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed. It is designed to reduce the risk of contracting with small businesses that may not have the credit history or prior experience of larger businesses. The SBA does not issue surety bonds. Instead, it provides and manages surety bond guarantees for qualified small and emerging businesses through its Surety Bond Guarantee (SBG) Program. The SBA reimburses a participating surety (within specified limits) for losses incurred due to a contractor's default on a bond.

The fourth column shows the outstanding principal balance for the SBA's 7(a) secondary market guarantee program, which is discussed later in this report. The final column reports the SBA's outstanding principal balance of loans that have not been charged off as of the end of the fiscal year. It provides a measure of the SBA's scope of lending.

As shown in Table 1 , the amount of non-disaster small business loans disbursed by the SBA declined in FY2008 and FY2009; increased, but remained below pre-recession levels in FY2010; and has generally exceeded pre-recession levels since FY2011.

The decline in the amount of small business loans guaranteed by the SBA during FY2008 and FY2009 was, at least in part, due to the following three interrelated factors:

many lending institutions become increasingly reluctant to lend to small businesses, even with an SBA loan guarantee, as loan defaults increased due to the recession, earnings fell, and an increasing number of lending institutions failed; the secondary market for small business loans, as with other secondary markets, began to contract in October 2008, reached its nadir in January 2009, and then began a relatively prolonged recovery. The SBA estimates that about half of the lenders that make SBA guaranteed loans resell them to obtain additional capital to make additional loans; and the demand for small business loans declined as many small business owners (and entrepreneurs considering starting a new small business) became more risk adverse during the recession.

In 2009, the number and amount of small business loans guaranteed by the SBA declined sharply early in the year, followed by modest increases during the second and third quarters, and briefly surpassed pre-recession levels in the fourth quarter as small business owners took advantage of ARRA funded fee subsidies for the SBA's 7(a) and 504/CDC loan guaranty programs and an increase in the 7(a) program's maximum loan guaranty percentage to 90%, which were expected to end by the end of the year.

The SBA argued that the increase in the number and amount of small business loans it guaranteed during FY2010 was primarily due to fee subsidies and loan enhancements first put in place under ARRA and later extended by law to cover most of the fiscal year. The SBA noted that its average weekly loan volume for FY2010 ($333 million) was 29% higher than its average weekly loan volume for FY2009 ($258 million). Another likely factor contributing to the higher loan volume was a general improvement in the economy as the recession ended (officially in June 2009) and the economic recovery began, albeit slowly in many parts of the nation.

The demand for SBA loans increased significantly during the first quarter of FY2011 (October-December 2010), as borrowers took advantage of SBA fee subsidies that were expected to expire at the end of the calendar year. The SBA announced, on January 3, 2011, that it "approved nearly 22,000 small business loans for $10.47 billion, supporting a total of $12.16 billion in lending" during the first quarter of FY2011, which "was the highest volume in a fiscal year's first quarter than at any time in the agency's history." After the fee subsidies ended, SBA lending declined during the second quarter of FY2011, and then increased somewhat during the final two quarters of FY2011. As mentioned previously, the amount of non-disaster small business loans disbursed by the SBA has continued at or above pre-recession levels since FY2011.

Recent Laws Designed to Enhance the Supply of Small Business Loans

As mentioned previously, several laws were enacted during the 110 th and 111 th Congresses to enhance small business access to capital. The following laws were enacted largely in response to the contraction of financial credit markets which started in 2008, and reached its nadir in early 2009.

P.L. 110-343 , the Emergency Economic Stabilization Act of 2008, was designed to enhance the supply of loans to businesses of all sizes. The act authorized the Troubled Asset Relief Program (TARP) to "restore liquidity and stability to the financial system of the United States" by purchasing or insuring up to $700 billion in troubled assets from banks and other financial institutions. TARP's purchase authority was later reduced from $700 billion to $475 billion by P.L. 111-203 , the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Department of the Treasury has disbursed $389 billion in TARP funds, including $337 million to purchase SBA 7(a) loan guaranty program securities. The authority to make new TARP commitments expired on October 3, 2010.

P.L. 111-5 (ARRA) included several provisions to enhance the supply of loans to small businesses. It

authorized the SBA to establish a temporary secondary market guarantee authority to provide a federal guarantee for pools of first lien 504/CDC program loans that are to be sold to third-party investors. The SBA was granted emergency rulemaking authority to issue regulations for the program within 15 days after enactment (by March 4, 2009). After experiencing unanticipated delays in implementing the program due to "limited staff resources" and determining how to meet ARRA reporting requirements, the SBA issued regulations for its 504/CDC First Mortgage Loan Pooling program on October 30, 2009, and it became operational in June 2010. The program was scheduled to end on February 16, 2011, or until $3 billion in new pools are created, whichever occurred first. As will be discussed, the Small Business Jobs Act of 2010 extended the program. authorized the SBA to use emergency rulemaking authority to issue regulations within 30 days after enactment (by March 19, 2009), to make below market interest rate direct loans to SBA-designated "Systemically Important Secondary Market (SISM) Broker-Dealers." These broker-dealers would use the loan funds to purchase SBA-guaranteed loans from commercial lenders, assemble them into pools, and sell them to investors in the secondary loan market. The SBA experienced unanticipated delays in implementing the program primarily due to the need to determine "the extent to which broker-dealers, and perhaps small business lenders, would be required to share in the potential losses associated with extending the guarantee in the 504 loan program." The SBA issued regulations to establish the Direct Loan Program for Systemically Important Secondary Market Broker-Dealers on November 19, 2009. provided $255 million for a temporary, two-year small business stabilization program to guarantee loans of $35,000 or less to small businesses for qualified debt consolidation, later named the America's Recovery Capital (ARC) Loan program (the program ceased issuing new loan guarantees on September 30, 2010); $15 million for the SBA's surety bond program, and temporarily increased the maximum bond amount from $2 million to $5 million, and up to $10 million under certain conditions (the higher maximum bond amounts ended on September 30, 2010); $6 million for the SBA's Microloan program's lending program and $24 million for the Microloan program's technical assistance program; and increased the funds ("leverage") available to SBA-licensed Small Business Investment Companies (SBICs) to no more than 300% of the company's private capital or $150,000,000, whichever is less. authorized the SBA to guarantee 504/CDC loans used to refinance business expansion projects as long as the existing indebtedness did not exceed 50% of the project cost of the expansion and the borrower met specified requirements.

P.L. 111-240 was enacted after the financial credit markets had stabilized. It included several provisions designed to enhance the supply of loans to small businesses. For example, the act

authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) to encourage community banks to provide small business loans ($4 billion was issued) and a $1.5 billion State Small Business Credit Initiative (SSBCI) to provide funding to participating states with small business capital access programs. extended the SBA's secondary market guarantee authority from two years after the date of ARRA's enactment to two years after the date of the program's first sale of a pool of first lien position 504/CDC loans to a third-party investor (which took place on September 24, 2010). authorized $22.5 million for a temporary, three-year Small Business Intermediary Lending Pilot Program to provide direct loans to intermediaries which provide loans to small business startups, newly established small businesses, and growing small businesses. On August 4, 2011, the SBA announced the first 20 community lenders which were selected to participate in the program. authorized $15 million in additional funding for the SBA's 7(a) loan guaranty program. increased the loan guarantee limits for the SBA's 7(a) program from $2 million to $5 million, and for the 504/CDC program from $1.5 million to $5 million for "regular" borrowers, from $2 million to $5 million if the loan proceeds are directed toward one or more specified public policy goals, and from $4 million to $5.5 million for manufacturers. increased the SBA's Microloan program's loan limit for borrowers from $35,000 to $50,000 and for microlender intermediaries after their first year in the program from $3.5 million to $5 million. temporarily increased for one year the SBA 7(a) Express Program's loan limit from $350,000 to $1 million (the temporary increase expired on September 26, 2011). required the SBA to establish an on-line lending platform listing all SBA lenders and information concerning their loan rates. authorized the SBA to temporarily guarantee for two years, under specified circumstances, 504/CDC loans that refinance existing business debt even if the project does not involve the expansion of the business.

For additional details concerning provisions in the Small Business Jobs Act of 2010, see Table A-1 in the Appendix .

During the 112 th Congress, P.L. 112-106 , the Jumpstart Our Business Startups Act (JOBS Act), established "a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding." The JOBS Act's crowdfunding provisions "were intended to help provide startups and small businesses with capital by making relatively low dollar offerings of securities, featuring relatively low dollar investments by the 'crowd,' less costly."

On November 16, 2015, the Securities and Exchange Commission (SEC) published a final rule, effective May 16, 2016, to implement the JOBS Act's crowdfunding provisions (e.g., the SEC established limits on the amount of money an issuer can raise and individual investors can invest over a 12-month period under the crowdfunding exemption to the securities laws, imposed disclosure requirements on the issuer's business and securities offering, and created a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions).

During the 113 th Congress, P.L. 113-76 , the Consolidated Appropriations Act, 2014, included a provision increasing the annual authorization amount for the SBA's Small Business Investment Company (SBIC) program to $4 billion from $3 billion. The SBIC program provides privately owned and managed SBA-licensed SBICs loans at favorable rates (called leverage), and, in exchange, the SBICs provide equity capital to small businesses in various ways, including by purchasing small business equity securities (e.g., stock, stock options, warrants), making loans to small businesses, purchasing debt securities from small businesses, and providing small businesses, subject to limitations, a guarantee of their monetary obligations to creditors not associated with the SBIC. The SBIC program is designed to stimulate and supplement "the flow of private equity capital and long term loan funds which small business concerns need for the sound financing of their business operations and for their growth, expansion, and modernization, and which are not available in adequate supply."

In FY2013, the SBA committed to guarantee $2.15 billion in SBIC small business investments, and SBICs invested another $1.34 billion from private capital, for almost $3.5 billion in financing for 1,068 small businesses. Although the SBA's commitment of $2.15 billion in SBIC leverage in FY2013 was well below the new $4 billion threshold amount, advocates of the higher threshold argued that the increase would enable the program to grow, providing more capital to a larger number of small businesses in the future. Subsequently, the SBA committed to guarantee $2.55 billion in SBIC small business investments in FY2014, $2.55 billion in FY2015, $2.51 billion in FY2016, $1.96 billion in FY2017, and $2.52 billion in FY2018.

During the 114 th Congress, P.L. 114-38 , the Veterans Entrepreneurship Act of 2015, increased the supply of 7(a) loans by increasing the program's FY2015 authorization limit of $18.75 billion (on disbursements) to $23.5 billion. The increased authorization amount was necessary to accommodate an unexpected increase in the demand for SBA loans. In addition, P.L. 114-113 , the Consolidated Appropriations Act, 2016, further increased the 7(a) program's authorization limit to $26.5 billion for FY2016. The act also increased the supply of 504/CDC loans by expanding the projects eligible for refinancing under the program in any fiscal year in which the refinancing program and the 504/CDC program as a whole do not have credit subsidy costs. The act generally limited the expanded refinancing to no more than 50% of the dollars loaned under the 504/CDC program during the previous fiscal year. The act also increased the supply of SBIC financings by increasing the SBIC program's family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million.

During the 115 th Congress, P.L. 115-31 , the Consolidated Appropriations Act, 2017, increased the 7(a) program's authorization limit to $27.5 billion for FY2017 from $26.5 billion in FY2016 and P.L. 115-141 , the Consolidated Appropriations Act, 2018, increased the 7(a) program's authorization limit to $29.0 billion for FY2018.

Recent Laws Designed to Enhance the Demand for Small Business Loans

ARRA provided the SBA $375 million to subsidize fees for the SBA's 7(a) and 504/CDC loan guaranty programs and to increase the 7(a) program's maximum loan guaranty percentage from up to 85% of loans of $150,000 or less and up to 75% of loans exceeding $150,000 to 90% for all regular 7(a) loans through September 30, 2010, or when appropriated funding for the subsidies and loan modification was exhausted. The fee subsidies were designed to increase the demand for SBA loans by reducing loan costs.

ARRA's funding for the fee subsidies and 90% maximum loan guaranty percentage was about to be exhausted in November 2009, when Congress passed the first of six laws to extend the loan subsidies and 90% maximum loan guaranty percentage:

P.L. 111-118 , the Department of Defense Appropriations Act, 2010, provided the SBA $125 million to continue the fee subsides and 90% maximum loan guaranty percentage through February 28, 2010. P.L. 111-144 , the Temporary Extension Act of 2010, provided the SBA $60 million to continue the fee subsides and 90% maximum loan guaranty percentage through March 28, 2010. P.L. 111-150 , an act to extend the Small Business Loan Guarantee Program, and for other purposes, provided the SBA authority to reprogram $40 million in previously appropriated funds to continue the fee subsides and 90% maximum loan guaranty percentage through April 30, 2010. P.L. 111-157 , the Continuing Extension Act of 2010, provided the SBA $80 million to continue the SBA's fee subsides and 90% maximum loan guaranty percentage through May 31, 2010. P.L. 111-240 , the Small Business Jobs Act of 2010, provided $505 million (plus an additional $5 million for administrative expenses) to continue the SBA's fee subsides and 90% maximum loan guaranty percentage from the act's date of enactment (September 27, 2010) through December 31, 2010. P.L. 111-322 , the Continuing Appropriations and Surface Transportation Extensions Act, 2011, authorizes the SBA to use funds provided under the Small Business Jobs Act of 2010 to continue the SBA's fee subsides and 90% maximum loan guaranty percentage through March 4, 2011, or until available funding is exhausted.

On January 3, 2011, the SBA announced that funding for the fee subsidies and 90% maximum loan guaranty percentage had been exhausted.

ARRA also included 11 tax relief provisions that have the potential to benefit small businesses in a broad range of industries. By reducing costs, it could be argued that providing tax relief for small businesses may lead to increased demand for small business loans because small business owners have additional resources available to invest in their business. The following five ARRA tax provisions provided about $5.7 billion in tax relief and were targeted at small businesses, whereas the other ARRA tax provisions were available to businesses of all sizes:

allowed businesses with $15 million or less in average annual gross receipts in the past three years to carry back net operating losses from 2008 for up to five years instead of two years. extended through 2009 the enhanced expensing allowance, which allows businesses to deduct up to $250,000 of the cost of eligible assets placed in service in 2009, within certain limits. increased the exclusion of the gain on the sale of small business stock to 75% (instead of 50%) of any gain realized on the sale of eligible small business stock acquired between February 18, 2009, and December 31, 2010. reduced the recognition period from 10 years to seven years for corporate tax on sale of appreciated assets in 2009 or 2010 by S corporations that once were organized as C corporations. allowed individuals who had an adjusted gross income in 2008 of less than $500,000 and can prove that over half their income came from a small business to base their estimated tax payments for 2009 on 90% of their tax liability for 2008.

P.L. 111-240 was designed to increase the demand for SBA loans by providing $505 million (plus an additional $5 million for related administrative expenses) to temporarily subsidize SBA's fees and increase the 7(a) program's maximum loan guaranty percentage to 90%. The act also required the SBA to establish an alternative size standard for the SBA's 7(a) and 504/CDC loan guaranty programs that uses maximum net worth and average net income as an alternative to the use of industry standards. It also established the following interim alternative size standard for both the 7(a) and 504/CDC programs: the business qualifies as small if it does not have a tangible net worth in excess of $15 million and does not have an average net income after federal taxes (excluding any carry-over losses) in excess of $5 million for two full fiscal years before the date of application. These changes were designed to increase the demand for small business loans by increasing the number of small businesses that are eligible for SBA assistance.

P.L. 111-240 also provided small businesses with about $12 billion in tax relief. The act

raised the exclusion of gains on the sale or exchange of qualified small business stock from the federal income tax to 100%, with the full exclusion applying only to stock acquired the day after the date of enactment through the end of 2010; increased the deduction for qualified start-up expenditures from $5,000 to $10,000 in 2010, and raised the phaseout threshold from $50,000 to $60,000 for 2010; placed limitations on the penalty for failure to disclose reportable transactions based on resulting tax benefits; allowed general business credits of eligible small businesses for 2010 to be carried back five years; exempted general business credits of eligible small businesses in 2010 from the alternative minimum tax; allowed a temporary reduction in the recognition period for built-in gains tax; increased expensing limitations for 2010 and 2011 and allowed certain real property to be treated as Section 179 property; allowed additional first-year depreciation for 50% of the basis of certain qualified property; and removed cellular telephones and similar telecommunications equipment from listed property so their cost can be deducted or depreciated like other business property.

As mentioned earlier, P.L. 114-38 authorized and made permanent the Obama Administration's waiver of the up-front, one-time loan guaranty fee for veteran loans under the SBAExpress loan guaranty program beginning on or after October 1, 2015, except during any upcoming fiscal year for which the President's budget, submitted to Congress, includes a credit subsidy cost for the 7(a) program, in its entirety, that is above zero. The fee waiver is designed to encourage veterans to apply for a small business loan.

Discussion

As mentioned previously, congressional interest in the SBA's access to capital programs has increased in recent years, primarily because assisting small business in accessing capital is viewed as a means to enhance job creation and economic growth. Some have argued that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They also point to surveys of small business firms conducted by the National Federation of Independent Business (NFIB) which suggest that small business owners consistently place financing issues near the bottom of their most pressing concerns. Instead of increasing federal funding for the SBA, they advocate small business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as the best means to assist small business and foster increased levels of economic growth and job creation.

Some advocates of providing additional resources to the SBA have argued that the federal government should enhance small business access to capital by creating a SBA direct lending program for small businesses. During the 111 th Congress, H.R. 3854 , the Small Business Financing and Investment Act of 2009, was passed by the House on October 29, 2009, by a vote of 389-32. It would have authorized a temporary SBA direct lending program. Also, during the 112 th Congress, H.R. 3007 , the Give Credit to Main Street Act of 2011, introduced on September 21, 2011, and referred to the House Committee on Small Business, would have authorized the SBA to provide direct loans to small businesses that have been in operation as a small business for at least two years prior to its application for a direct loan. The maximum loan amount would have been the lesser of 10% of the firm's annual revenues or $500,000. Also, H.R. 5835 , the Veterans Access to Capital Act of 2012, introduced on May 18, 2012, and referred to the House Committee on Small Business, would have authorized the SBA to provide up to 20% of the annual amount available for guaranteed loans under the 7(a) and 504/CDC loan guaranty programs, respectively, in direct loans to veteran-owned and -controlled small businesses.

During the 113 th Congress, H.R. 2451 , the Strengthening Entrepreneurs' Economic Development Act of 2013, introduced on June 20, 2013, and referred to the House Committee on Small Business, would have authorized the SBA to establish a direct lending program for small businesses that have fewer than 20 employees. Under the bill, each loan would be limited to $150,000 and have a term of six years or less. Before issuing a direct loan, the SBA would be required to make the loan available to eligible lenders within 50 miles of the applicant's principal office. If no local lenders agree to originate, underwrite, close, and service the loan within five business days, the SBA would make the loan available to lenders in the Preferred Lender program. If still no lenders agree to originate, underwrite, close, and service the loan, the SBA shall, within 10 business days, consider the application for a direct loan.

The SBA has authority to make direct loans, both for disaster relief and for business purposes. The SBA limited the eligibility for direct business loans in 1984, 1994, and 1996 as a means to reduce costs. Until October 1, 1985, the SBA provided direct business loans to qualified small businesses. From October 1, 1985, to September 30, 1994, SBA direct business loan eligibility was limited to qualified small businesses owned by individuals with low income or located in an area of high unemployment, owned by Vietnam-era or disabled veterans, owned by the handicapped or certain organizations employing them, or certified under the minority small business capital ownership development program. Microloan program intermediaries were also eligible. On October 1, 1994, SBA direct loan eligibility was limited to Microloan program intermediaries and to small businesses owned by the handicapped. Funding to support direct loans to the handicapped through the Handicapped Assistance (renamed the Disabled Assistance) Loan program ended in 1996. The last loan issued under the Disabled Assistance Loan program took place in FY1998. The SBA currently offers direct business loans only to Microloan program intermediaries.

Advocates for a small business direct lending program have argued that such a program would provide "rapid access to much-needed capital without having to face the administrative delays posed by the current Small Business Administration lending process." Advocates of a temporary SBA direct lending program argued that such a program was necessary during periods of economic difficulty because

In prosperous times, small businesses are able to shop around to different lenders to find the best available terms and conditions for a loan. But in times of economic downturns, those same lenders aren't as willing to lend to small businesses. More than ever during these times, it's the government's responsibility to step in to help small businesses access the loans they need to keep their businesses running and workers employed.

Opponents of a small business direct lending program argue that the SBA's mission is to augment the private sector by guaranteeing loans, not compete with it by providing direct loans to small businesses. They also argue that these loans hold greater risk than most; otherwise the private sector would accept them. They worry that SBA defaults may increase, resulting in added expense, either to taxpayers in the form of additional appropriations or to other small business borrowers in the form of higher fees, to cover the defaults. They argue that the SBA stopped offering direct loans in 1995, primarily because the subsidy rate was "10 to 15 times higher than that of our guaranty programs." They also assert that providing direct loans to small businesses might invite corruption. They note that the Reconstruction Finance Corporation (RFC), the SBA's predecessor, made direct loans to business and was accused of awarding loans based on the applicant's political connections or personal ties with RFC loan officers. Opponents also argue that the SBA does not have the human, physical, and technical resources to make direct loans.

Still others argue that providing additional funding for SBA programs is largely a symbolic gesture because the SBA's guaranteed loan programs account for a relatively small fraction of small business lending. They argue that, in a typical year, no more than 1% of small businesses receive an SBA-guaranteed loan, and those loans account for less than 3% or 4% of the total amount loaned to small businesses. They assert that "these numbers show that the private banking system finances most loans and that the SBA is therefore largely irrelevant in the capital market."

SBA Funding

As mentioned previously, some have argued that the SBA should be provided additional funding to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worry about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocate fiscal restraint as the best means to assist small business and foster increased levels of economic growth and job creation. Both of these views have been reflected in recent SBA budget discussions as Congress has focused on ways to reduce the SBA's budget while not compromising the SBA's ability to assist small businesses access capital and assist individuals and businesses of all sizes cope with damages caused by natural disasters.

As shown in Table 2 , the SBA's appropriations have varied significantly since FY2005, ranging from a high of $2.360 billion in FY2018 to a low of $571.8 million in FY2007. Much of this volatility has resulted from significant increases in appropriations for disaster assistance in response to major hurricanes; increases in appropriations for business loan credit subsidies following recessions; and significant, temporary increases in appropriations for the SBA's other programs in FY2009 ($724.0 million) and FY2010 ($962.5 million) that were designed to enhance small businesses' access to capital following the Great Recession.

The SBA's appropriations are separated into four categories in Table 2 (disaster assistance, disaster assistance supplemental, business loan credit subsidies, and other programs) because the need for disaster assistance is largely beyond congressional control and expenditures for business loan credit subsidies tend to vary with changes in the national economy. As a result, it could be argued that comparisons of SBA appropriations over time can be made more meaningful if those comparisons include appropriations for all four categories of spending.

For example, the SBA's appropriation of $2.360 billion in FY2018 was nearly double its appropriation of $1.337 billion in FY2017 and nearly three times its appropriation of $871.0 million in FY2016. However, most of this increase was due to increased supplemental funding for disaster assistance.

As shown in Table 2 , the SBA's FY2018 appropriation of $2.360 billion includes $1.659 billion in supplemental funding for disaster assistance, $3.4 million for business loan credit subsidies (for the Microloan program), and $697.4 million for all other SBA programs ($268.5 million for salaries and expenses; $247.1 million for entrepreneurial development programs, such as SCORE, Small Business Development Centers, and Women Business Centers; $152.8 million for administrative expenses related to the SBA's business loan programs; $19.9 million of the Office of Inspector General; and $9.1 million for the Office of Advocacy).

Concluding Observations

Congress approved many changes during the 111 th Congress to enhance small business access to capital. For example, P.L. 111-240 authorized the Secretary of the Treasury to establish a $30 billion Small Business Lending Fund (SBLF) to make capital investments in eligible community banks ($4 billion was issued). It authorized a $1.5 billion State Small Business Credit Initiative Program to be administered by the Department of the Treasury. It made numerous changes to SBA programs in an attempt to make them more accessible to small businesses, such as increasing maximum loan amounts, creating an alternative size standard so more businesses can qualify for assistance, waiving some matching requirements, and temporarily expanding refinancing options under the 504/CDC program. It provided funding to extend SBA fee subsidies and the 7(a) program's 90% maximum loan guaranty percentage, passed legislation to increase small business contracting opportunities, and provided about $12 billion in tax relief for small businesses. In addition, Congress approved legislation to temporarily reduce, for calendar years 2011 and 2012, payroll taxes by two percentage points for workers (including self-employed small business owners) who pay into Social Security. The NFIB has long advocated a reduction of federal payroll taxes as a means to reduce small business expenses.

During the 112 th Congress, Congress passed legislation to expand access to the SBA's surety bond guarantee program, amend the SBA's size standard practices, require a review of the federal procurement small business goaling program, expand small business mentor-protégé programs, and establish a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding.

During the 113 th and 114 th Congresses, Congress approved legislation that increased the annual authorization amount for the SBA's SBIC program to $4 billion from $3 billion, authorized and made permanent the Obama Administration's waiver of the up-front, one-time loan guaranty fee for veteran loans under the SBAExpress loan guaranty program, expanded the projects eligible for refinancing under the 504/CDC loan guarantee program, and increased the SBIC program's family of funds limit (the amount of outstanding leverage allowed for two or more SBIC licenses under common control) to $350 million from $225 million.

The question for the 116 th Congress is what, if any, additional action should the federal government take to enhance small business access to capital? Should Congress decide to take further action, three not necessarily mutually exclusive options are readily apparent.

First, Congress could adopt a wait-and-see strategy that focuses on congressional oversight of the programmatic changes to the SBA's programs that were enacted during recent Congresses. Advocates of this approach could argue that small business credit markets have generally improved over the past several years, the SBA's lending now exceeds pre-recession levels, and the demand for small business loans is increasing. Therefore, it could be argued that evaluating the impact of the programmatic changes to the SBA's programs that have been enacted over the past several years, especially given that economic conditions appear to be improving, should take place before taking further congressional action to improve small business access to capital.

Second, Congress could consider additional changes to the SBA's programs in an effort to enhance small business access to capital, such as considering a direct lending program, providing additional funding for SBA fee subsidies and loan modifications, modifying the Microloan program, or increasing funding for SBA programs. Advocates of this approach could argue that although small business credit markets have generally improved over the past several years, job growth is still a concern. In their view, assisting small businesses access capital would help to create and retain jobs.

Third, Congress could consider the repeal of portions of the Small Business Jobs Act of 2010, or other SBA programs. For example, on March 15, 2011, the House Committee on Small Business approved its views and estimates for the concurrent resolution on the budget for FY2012. The committee recommended that the SBA's budget be "cut nearly $100 million." The committee recommended that 14 programs, including several management and technical assistance training programs, be defunded "because they duplicate existing programs at the SBA or at other agencies" or "where there is an absence of any evidence that they will help small businesses create new jobs." In its views and estimates letter for the FY2013 budget, the House Committee on Small Business recommended, on March 7, 2012, that funding be reduced for several SBA programs, including funding for 7(j) technical assistance, microloan technical assistance, and the National Women's Business Council. It also recommended that funding be eliminated for Women's Business Centers, Veterans Business Centers, Prime Technical Assistance, HUBZone outreach, the Office of Native American Affairs, and the Office of International Trade. It also recommended that funding be eliminated for several SBA initiatives, including the Drug-Free Workplace, Clusters, and National Veterans Entrepreneurial Training Program.

Advocates of this option argue that instead of increasing federal funding for the SBA, the federal government should focus on small business tax reduction and federal fiscal restraint as the best means to assist small business and foster increased levels of economic growth and job creation.

Appendix. Selected Provisions in the Small Business Jobs Act of 2010