Small Business Administration Microloan Program
Released: 2019-03-08T00:00:00

Small Business Microloans and Training Assistance

The Small Business Administration (SBA) administers programs that support small businesses, including loan guarantees to lenders to encourage them to provide loans to small businesses "that might not otherwise obtain financing on reasonable terms and conditions" and grants to nonprofit organizations to provide marketing, management, and technical training assistance to small business owners. Historically, one of the justifications presented for funding the SBA's loan guarantee programs has been that small businesses can be at a disadvantage, compared with other businesses, when trying to obtain access to sufficient capital and credit. It has been argued that this disadvantage is particularly acute for startups and microbusinesses (firms with fewer than five employees):

Traditional lending institutions, such as banks and investors, are unlikely to offer loans and investment capital to microfirms due to a variety of reasons. One barrier to microlending is a concern that startups and smaller enterprises are risky investments since growing businesses typically exhibit erratic bursts of growth and downturn. The perceived risk of these types of companies reduces the chances of a microbusiness to obtain financing. Another issue is that microbusinesses by and large require smaller amounts of capital, and thus banks or investment companies often believe that it is not efficient use of their time or resources, nor will they receive a substantive return on investment from such a small loan amount.

An Urban Institute survey of SBA 7(a), 504/Certified Development Company (504/CDC), Small Business Investment Company (SBIC), and Microloan borrowers conducted in 2007 found that Microloan borrowers reported having the most difficulty in finding acceptable financing elsewhere. Less than one-third (31%) of Microloan borrowers reported that they would have been able to find acceptable financing elsewhere, compared with 35% of SBIC borrowers, 40% of 7(a) borrowers, and 48% of 504/CDC borrowers.

Since its inception in 1953, the SBA has provided loan guarantees to encourage lenders to issue small businesses loans. Interest in creating a separate loan program to address the specific needs of startups and microbusinesses increased during the 1980s, primarily due to the growth and experience of microlending institutions abroad and evidence concerning private lending practices that led Congress to conclude that a new loan program was necessary "to reach very small businesses that were not being served by traditional lenders of SBA's credit programs."

To address the perceived disadvantages faced by very small businesses in gaining access to capital, Congress authorized the SBA's Microloan lending program in 1991 ( P.L. 102-140 , the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1992). The program became operational in 1992. Its stated purpose is

to assist women, low-income, veteran ... and minority entrepreneurs and business owners and other individuals possessing the capability to operate successful business concerns; to assist small business concerns in those areas suffering from a lack of credit due to economic downturns; ... to make loans to eligible intermediaries to enable such intermediaries to provide small-scale loans, particularly loans in amounts averaging not more than $10,000, to start-up, newly established, or growing small business concerns for working capital or the acquisition of materials, supplies, or equipment; [and] to make grants to eligible intermediaries that, together with non-Federal matching funds, will enable such intermediaries to provide intensive marketing, management, and technical assistance to microloan borrowers.

The SBA's Microloan lending program was authorized initially as a five-year demonstration project. It was made permanent, subject to reauthorization, in 1997 ( P.L. 105-135 , the Small Business Reauthorization Act of 1997).

Congressional interest in the Microloan program has increased in recent years, primarily because microloans are viewed as a means to assist very small businesses, especially women- and minority-owned startups, obtain loans that enable them to create jobs. Job creation and preservation, always a congressional interest, has taken on increased importance given continuing concerns about job growth.

This report describes the Microloan program's eligibility standards and operating requirements for lenders and borrowers and examines the arguments presented by the program's critics and advocates. It also examines changes to the program authorized by P.L. 111-240 , the Small Business Jobs Act of 2010, P.L. 115-141 , the Consolidated Appropriations Act, 2018, and P.L. 115-232 , the John S. McCain National Defense Authorization Act for Fiscal Year 2019.

P.L. 111-240 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 ($4.0 billion was issued), a $1.5 billion State Small Business Credit Initiative to provide funding to participating states with small business capital access programs, and about $12 billion in tax relief for small businesses. It also authorized changes to the SBA's loan guaranty programs, including increasing the Microloan program's loan limit for borrowers from $35,000 to $50,000, and the aggregate loan limit for intermediaries after their first year of participation in the program from $3.5 million to $5 million. It also authorized the SBA to waive, in whole or in part through FY2012, the nonfederal share requirement for loans to the Microloan program's intermediaries and for grants made to Microloan intermediaries for small business marketing, management, and technical assistance for up to a fiscal year.

P.L. 115-141 , among other provisions, relaxed requirements on Microloan intermediaries that prohibited them from spending more than 25% of their technical assistance grant funds on prospective borrowers and more than 25% of those grant funds on contracts with third parties to provide that technical assistance. The act increased those percentages to 50% (originally in H.R. 2056 , the Microloan Modernization Act of 2017, and S. 526 , its companion bill in the Senate).

Also, P.L. 115-232 , among other provisions, increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million (originally in H.R. 2056 , the Microloan Modernization Act of 2017, and S. 526 , its companion bill in the Senate).

This report also discusses several bills introduced during the 114 th and 115 th Congresses. For example, during the 114 th Congress,

S. 1445 , the Microloan Act of 2015, would have removed the requirements that no more than 25% of Microloan technical assistance grant funds may be used to provide information and technical assistance to prospective borrowers or on third-party contracts to provide that assistance. It would have also eliminated the Microloan program's minimum state allocation formula. H.R. 2670 , the Microloan Modernization Act of 2015, and S. 1857 , the Senate companion bill, would have increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million, increased the program's repayment terms from not more than 6 years to not more than 10 years for loans greater than $10,000, and required the SBA Administrator to establish a rule enabling intermediaries to apply for a waiver of the requirement that no more than 25% of Microloan technical assistance grant funds may be used to provide information and technical assistance to prospective borrowers. The House passed H.R. 2670 on July 13, 2015. S. 2850 , the Microloan Program Modernization Act of 2016, would have increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million and, among other provisions, eliminated the requirements that intermediaries spend no more than 25% of Microloan technical assistance grant funds on technical assistance to prospective borrowers and no more than 25% of those funds on third party contracts for technical assistance.

During the 115 th Congress,

H.R. 2056 , the Microloan Modernization Act of 2017, and S. 526 , its companion bill in the Senate would, as introduced, increase the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million and, among other provisions, eliminate the requirement that intermediaries spend no more than 25% of Microloan technical assistance grant funds on technical assistance to prospective borrowers and no more than 25% of those funds on third-party contracts for technical assistance.

H.R. 2056 and S. 526 were amended in committee to require intermediaries to spend no more than 50% of Microloan technical assistance grant funds on technical assistance to prospective borrowers and no more than 50% of those funds on third-party contracts for technical assistance. The House bill, as amended, was favorably reported by the House Committee on Small Business on July 12, 2017, and agreed to by the House on July 24, 2017, by voice vote. The Senate bill was favorably reported by the Senate Committee on Small Business and Entrepreneurship on March 19, 2018.

As mentioned previously, the 50% thresholds were included in P.L. 115-141 and the increase from $5 million to $6 million for the Microloan program's aggregate loan limit for intermediaries after their first year of participation was included in P.L. 115-232 .

The SBA Microloan Program: Funding, Eligibility Standards, Program Requirements, and Statistics

Unlike the SBA's 7(a) and 504/CDC loan guarantee programs, the SBA Microloan program does not guarantee loans. Instead, it provides direct loans to qualified nonprofit intermediary Microloan lenders who, in turn, provide "microloans" of up to $50,000 to small business owners, entrepreneurs, and nonprofit child care centers. There are currently 144 active Microloan intermediaries serving 49 states, the District of Columbia, and Puerto Rico.

Funding

The Microloan program's administrative costs (anticipated to be $47.66 million in FY2018) are funded through the SBA's salaries and expenses and business loan administration accounts. In addition, each year the SBA receives an appropriation for credit subsidies for its direct lending (Microloan) program.

Business loan credit subsidies represent the net present value of cash flows to and from the SBA over the life of the loan portfolio. For guaranteed loans, the net present value of cash flows is primarily affected by the difference between the cost of purchasing loans that have defaulted and the revenue generated from fees and collateral liquidation. For direct (Microloan) lending, the net present value of cash flows is primarily affected by the cost of offering below market interest rates to intermediaries because the cost of purchasing loans that have defaulted is typically relatively small because intermediaries are required to maintain a loan loss reserve. In addition, the SBA does not charge intermediaries fees.

In FY2019, the SBA was provided $4.0 million, to remain available until expended, for direct (Microloan) business loan credit subsidies. This appropriation was expected to support about $42.0 million in lending to intermediaries.

The SBA received an appropriation of $31.0 million in FY2019 for grants to selected Microloan intermediaries and qualified "non-lending technical assistance providers" to provide Microloan borrowers and prospective borrowers marketing, management, and technical training assistance.

As shown in Table 1 , Microloan intermediaries provided counseling services to 19,600 small businesses in FY2017. The data indicate that the number of small businesses served by the Microloan technical assistance program has generally increased in recent years.

Intermediary Microloan Lender Eligibility Standards

To become a qualified intermediary Microloan lender, an applicant must

be organized as a nonprofit community development corporation or other entity, a consortium of nonprofit community development corporations or other entities, a quasigovernmental economic development corporation, or an agency established by a Native American Tribal Government; be located in the United States, including the Commonwealth of Puerto Rico, the U.S. Virginia Islands, Guam, and American Samoa; have made and serviced short-term, fixed rate loans of not more than $50,000 to newly established or growing small businesses for at least one year; and have at least one year of experience providing technical assistance to its borrowers.

If accepted into the program by the SBA, an intermediary may borrow no more than $750,000 from the SBA during its first year of participation. After the first year, the maximum loan amount is $2.5 million. By law, an intermediary's total outstanding Microloan program debt must not exceed $6 million.

The SBA approves and lends funds, subject to the availability of appropriations, to intermediaries based on the order in which applications are received. The amount provided is subject to two statutory limitations.

No more than 300 intermediaries may participate in the Microloan program at any given time. During the first six months of each fiscal year, subject to the availability of appropriations, at least $800,000 or 1/55 th of available loan funds (whichever is less) is required to be made available for loans to intermediaries in each state (including the District of Columbia, the Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, and American Samoa).

Any applications that cannot be funded during the first six months "due to geographic limitations will be kept on file in the order they were received" and, subject to the availability of funds, "will be funded during the seventh month of the fiscal year [April]." If the amount of requested loan funds exceeds the amount of available funds, the SBA "may hold back up to 20% of available loan funds to ensure that due consideration is given to new intermediaries and those having the greatest impact to underserved markets." Also, if the amount of requested loan funds from new intermediaries exceeds the amount of available funds, the SBA "may choose to select a new intermediary in an underserved location (a location that is currently unserved by an SBA Microloan Program Intermediary Lender), as determined by the Agency, over a new applicant in an area that is already served by one or more existing Intermediaries."

Intermediary Microloan Lender Program Requirements

Intermediaries are not required to make any interest payments on the Microloan during the first year, but interest accrues from the date that the SBA disburses the loan proceeds to the intermediary. After that, the SBA determines the schedule for periodic payments. Loans must be repaid within 10 years.

The SBA charges intermediaries an interest rate that is based on the five-year Treasury rate, adjusted to the nearest one-eighth percent (called the Base Rate), less 1.25% if the intermediary maintains an historic portfolio of Microloans averaging more than $10,000, and less 2.0% if the intermediary maintains an historic portfolio of Microloans averaging $10,000 or less. The Base Rate, after adjustment, is called the Intermediary's Cost of Funds. The Intermediary's Cost of Funds is initially calculated one year from the date of the note and is reviewed annually and adjusted as necessary (called recasting). The interest rate cannot be less than zero.

Intermediaries are required to contribute not less than 15% of the loan amount in cash from nonfederal sources and, as security for repayment of the loan, must provide the SBA first lien position on all notes receivable from any microloans issued under the program. Unlike the SBA's 7(a) and 504/CDC loan guarantee programs, the SBA does not charge intermediaries upfront or ongoing service fees under the Microloan program.

As mentioned previously, P.L. 111-240 temporarily allowed the SBA to waive, in whole or in part through FY2012, the intermediary's 15% nonfederal share requirement under specified circumstances (e.g., the economic conditions affecting the intermediary and the intermediary's performance) for up to a fiscal year.

Intermediaries are required to deposit the proceeds from the SBA's loans, their 15% contribution, and payments from their Microloan borrowers into a Microloan Revolving Fund. Intermediaries may only withdraw from this account funds necessary to make microloans to borrowers, repay the SBA, and establish and maintain a Loan Loss Reserve Fund to pay any shortage in the Microloan Revolving Fund caused by delinquencies or losses on its microloans. They are required, until they have been in the program for at least five years, to maintain a balance in the Loan Loss Reserve Fund equal to 15% of the outstanding balance of the notes receivable from their Microloan borrowers. After five years, if the intermediary's average annual loss rate during the preceding five years is less than 15% and no other factors exist that may impair the intermediary's ability to repay its obligations to the SBA, the SBA Administrator may reduce the required balance in the intermediary's Loan Loss Reserve Fund to the intermediary's average annual loss rate during the preceding five years, but not less than 10% of the portfolio. Intermediaries are required to maintain their Loan Loss Reserve Fund until they have repaid all obligations owed to the SBA.

The SBA does not maintain detailed data necessary to determine an aggregate default rate for Microloan borrowers. However, in 2007, the SBA estimated that the borrower default rate for the Microloan program was about 12%. Because the Loan Loss Reserve Fund is used to contribute toward the cost of borrower defaults, and is often sufficient to cover the entire cost of such defaults, the SBA's loss rate for intermediary repayment is typically less than 3% each year.

An intermediary may be suspended or removed from the Microloan program if it fails to comply with a specified list of program performance standards. For example, intermediaries are required to close and fund at least 10 microloans per year, cover the service territory assigned by the SBA, honor the SBA determined boundaries of neighboring intermediaries and non-lender technical assistance providers, fulfill reporting requirements, maintain a loan currency rate of 85% or more (where loans are no more than 30 days late in scheduled payments), maintain a default rate of 15% or less, and "satisfactorily provide" in-house technical assistance to microloan clients and prospective microloan clients.

Intermediary Marketing, Management, and Technical Training Assistance

As mentioned previously, in FY2019, the SBA received $31.0 million for grants to Microloan intermediaries and qualified "non-lending technical assistance providers" to provide Microloan borrowers and prospective borrowers marketing, management, and technical training assistance (see Appendix for previous funding levels).

Intermediaries are eligible to receive a Microloan technical assistance grant "of not more than 25% of the total outstanding balance of loans made to it under this subsection." Grant funds may be used only to provide marketing, management, and technical assistance to Microloan borrowers, except that no more than 50% of the funds may be used to provide such assistance to prospective Microloan borrowers. Grant funds may also be used to attend training required by the SBA. Also, intermediaries must contribute, solely from nonfederal sources, an amount equal to 25% of the grant amount. In addition to cash or other direct funding, the contribution may include indirect costs or in-kind contributions paid for under nonfederal programs. Intermediaries may expend no more than 50% of the grant funds on third-party contracts for the provision of technical assistance.

In addition, as mentioned earlier, P.L. 111-240 temporarily allowed the SBA to waive, in whole or in part through FY2012, the 25% nonfederal share requirement for grants made to Microloan intermediaries for small business marketing, management, and technical assistance under specified circumstances (e.g., the economic conditions affecting the intermediary and the intermediary's performance) for up to a fiscal year.

The SBA does not require Microloan borrowers to participate in the marketing, management, and technical assistance program. However, intermediaries typically require Microloan borrowers to participate in the training program as a condition of the receipt of a microloan. Combining loan and intensive training assistance is one of the Microloan program's distinguishing features.

Intermediaries that have a portfolio of loans made under the program "that averages not more than $10,000 during the period of the intermediary's participation in the program" are eligible to receive an additional training grant equal to 5% of "the total outstanding balance of loans made to the intermediary." Intermediaries are not required to make a matching contribution as a condition of receiving these additional grant funds.

Non-lending Technical Assistance Providers

Each year, the SBA is authorized to select qualified nonprofit, non-lending technical assistance providers to receive grant funds to provide marketing, management, and technical assistance to Microloan borrowers. Any nonprofit entity that is not an intermediary may apply for these funds.

The SBA may award up to 55 grants each year to qualified non-lending technical assistance providers to deliver marketing, management, and technical assistance to Microloan borrowers. The grants may be for terms of up to five years and may not exceed $200,000. The nonprofit entity must contribute, solely from nonfederal sources, an amount equal to 20% of the grant. In addition to cash or other direct funding, the contribution may include indirect costs or in-kind contributions paid for under nonfederal programs.

The SBA stopped awarding these grants at the beginning of FY2005. The SBA determined at that time that the non-lending technical assistance providers duplicated much of what was already being provided by Microloan intermediaries and other SBA entrepreneurial development programs.

Microloan Borrower Eligibility Standards

With one exception, Microloan borrowers must be an eligible, for-profit small business as defined by the Small Business Act. P.L. 105-135 , the Small Business Reauthorization Act of 1997, expanded the Microloan program's eligibility to include borrowers establishing a nonprofit childcare business.

Microloan Borrower Program Requirements

Intermediaries are directed by legislative language to provide borrowers "small-scale loans, particularly loans in amounts averaging not more than $10,000." They are also directed, "to the extent practicable ... to maintain a microloan portfolio with an average loan size of not more than $15,000." Microloans for more than $20,000 are allowed "only if such small business concern demonstrates that it is unable to obtain credit elsewhere at comparable interest rates and that it has good prospects for success." The maximum loan amount is $50,000 and no borrower may owe an intermediary more than $50,000 at any one time.

Microloan proceeds may be used only for working capital and acquisition of materials, supplies, furniture, fixtures, and equipment. Loans cannot be made to acquire land or property, and must be repaid within six years. Within these parameters, loan terms vary depending on the loan's size, the planned use of funds, the requirements of the intermediary lender, and the needs of the small business borrower. During the 114 th Congress, H.R. 2670 would have increased the program's repayment terms from not more than 6 years to not more than 10 years for loans greater than $10,000.

On loans of more than $10,000, the maximum interest rate that can be charged to the borrower is the interest rate charged by the SBA on the loan to the intermediary, plus 7.75 percentage points. On loans of $10,000 or less, the maximum interest rate that can be charged to the borrower is the interest charged by the SBA on the loan to the intermediary, plus 8.5 percentage points. Rates are negotiated between the borrower and the intermediary, and typically range from 6.5% to 9%. In FY2018, the average interest rate charged was 7.6%.

Each intermediary establishes its own lending and credit requirements. However, borrowers are generally required to provide some type of collateral (consistent with prudent lending practices), and a personal guarantee to repay the loan. The SBA does not review the loan for creditworthiness.

Intermediaries are allowed to charge borrowers reasonable packaging fees limited to 3% of the loan amount for loans with terms of one year or more, and 2% for loans with terms of less than one year. Intermediaries are also allowed to charge borrowers "actual, paid and documented out-of-pocket closing costs … such as filing or recording fees, collateral appraisals, credit reports, and other such direct charges related to loan closing." These fees may be added to the loan amount and financed over the life of the loan "provided the total loan amount, including the fee, does not exceed $50,000."

Microloan Program Statistics

Table 2 provides the number and amount of loans that the SBA provided Microloan intermediaries from FY2010 through FY2017, the number and amount of loans to Microloan intermediaries that the SBA approved in FY2018 (before loan cancelations, etc.), and the number and amount of Microloans that intermediaries provided small businesses from FY2010 through FY2018.

As shown in Table 2 , in FY2018, the SBA approved 58 loans to intermediaries totaling $37.3 million. The average approved intermediary loan amount was $643,724. Microloan intermediaries provided 5,459 loans to small businesses totaling $76.8 million. The average Microloan amount was $14,071.

As of the end of FY2018, the SBA had disbursed 1,230 loans to Microloan intermediaries totaling $562.5 million. At that time, there were 485 active Microloan intermediary loans with an unpaid principal balance of $165.3 million.

As shown in Table 2 , the number and amount of Microloans provided to small businesses have generally increased in recent years.

The Microloan program is open to all small business entrepreneurs, but targets new and early-stage businesses in "underserved markets, including borrowers with little to no credit history, low-income borrowers, and women and minority entrepreneurs in both rural and urban areas who generally do not qualify for conventional loans or other, larger SBA guaranteed loans." An analysis conducted by the Urban Institute found that about 9.9% of conventional small business loans are issued to minority-owned small businesses and about 16% of conventional small business loans are issued to women-owned businesses. In FY2018, of those reporting their race, minority-owned or -controlled firms received 47.4% of the number of microloans issued and 33.8% of the amount issued. Women-owned or -controlled firms received 48.7% of the number of microloans issued and 38.9% of the amount issued.

More than three-quarters of all Microloan borrowers (81.0%) in FY2018 were located in an urban area. Also, in FY2018, startup companies received 38.0% of the number of microloans issued and 36.4% of the total amount of microloans issued.

As mentioned previously, the Microloan program's estimated borrower default rate is about 12%. Because the Loan Loss Reserve Fund is used to contribute toward the cost of borrower defaults, and is often sufficient to cover the entire cost of such defaults, the SBA's loss rate for intermediary repayment is typically less than 3% annually. For example, the Microloan program's intermediary default rate was 2.36% in FY2015, 1.60% in FY2016, 2.26% in FY2017, and 2.29% in FY2018.

Microloans are often used for more than one purpose. In FY2018, they were most commonly used for working capital (70.4%), equipment (25.8%), inventory (21.5%), and supplies (7.6%).

Congressional Issues

Critics of the SBA's Microloan program argue that it is duplicative of other available programs, expensive relative to alternative programs, and subject to administrative shortfalls. The program's advocates argue that it provides assistance that "reaches many who otherwise would not be served by the private sector or even the SBA's 7(a) loan program" and "has provided an important source of capital for low-income women business owners and minority borrowers."

Program Duplication

Critics of the SBA's Microloan program argue that its direct lending program is duplicative of the SBA's 7(a) loan guarantee program and its marketing, management, and technical training assistance grant program is duplicative of the SBA's training assistance provided through Small Business Development Centers, SCORE (Service Corps of Retired Executives), and Women Business Centers. For example, President George W. Bush proposed to eliminate all funding for the Microloan program in his FY2005, FY2006, and FY2007 budget requests to Congress, arguing that "the 7(a) program is capable of serving the same clientele through the Community Express programs for much lower cost to the Government." President Bush also proposed to terminate the Microloan program's marketing, management, and technical assistance grant program in his FY2008 and FY2009 budget requests to Congress.

Critics argued in 2007 that about 44% of the SBA's 7(a) program's loan guarantees at that time were for loans under $35,000 (the Microloan program's former loan limit for borrowers), representing more than 17 times the number of loans issued through the SBA's Microloan program. In their view, the 7(a) program had demonstrated that it can service the needs of small businesses targeted by the SBA's Microloan program. They also argued that the SBA's Microloan program's marketing, management, and technical assistance grants program was not necessary because the SBA "already supports a nationwide network of resource partners who provide counseling and training to entrepreneurs, including Small Business Development Centers, Women's Business Centers, and SCORE." They argued that about 94% of Microloan intermediaries are located within 20 miles of a Small Business Development Center, a Women's Business Center, or a SCORE partner.

Advocates argue that the SBA's Microloan program is complementary, not duplicative, of the SBA's 7(a) loan guarantee program. They assert that Microloan borrowers are particularly disadvantaged when seeking access to capital, often having no credit history or lower credit scores than most applicants for the SBA's 7(a) loan guarantee program. In their view, it is important that the SBA has a program whose sole focus is to assist Microloan borrowers in starting microbusinesses and have in place intermediaries that "have essential expertise on the needs of this key demographic."

Advocates also argue that the SBA's Microloan marketing, management, and technical assistance grants program is "a crucial element which enables intermediaries to assist microbusiness owners step by step through their development and growth" and "not only increases the likelihood of full repayment of the loan, but augments business survival and success." As mentioned previously, intermediaries typically require Microloan borrowers to participate in the training program as a condition of the receipt of the microloan.

Program Cost

Critics of the SBA's Microloan program argue that it is expensive relative to other SBA programs, costing about $7,506 per small business assisted in FY2017, compared to $1,316 per small business assisted in the SBA's 7(a) loan guarantee program. President George W. Bush cited the program's higher expense when he recommended in his FY2005, FY2006, and FY2007 budget requests to Congress that the program be terminated and when he recommended in his FY2008 and FY2009 budget requests to Congress that the interest rate charged to Microloan intermediaries be increased to make the program "self-financing."

Advocates argue that the program's higher cost per small business assisted is unavoidable given the relatively unique nature of the program and the special needs of its borrowers. They assert that intermediaries often have to spend a significant amount of time with Microloan borrowers because those borrowers tend to have less experience with the credit application process and a more difficult time documenting their qualifications for assistance than borrowers in the SBA's loan guaranty programs. Also, in their view, raising the interest rate charged to intermediaries to make the program self-financing would reduce the program's cost, but could also defeat the program's purpose. They assert that because microloans are small, it is difficult for intermediaries to generate enough interest income to cover their costs. As a result, if the interest rate charged to intermediaries is increased, they contend that intermediaries would have to pass the increase on to Microloan borrowers. In their view, increasing the program's cost to Microloan borrowers "will create an economic hardship for them and make it more difficult for them to grow their businesses" and "lead to fewer jobs created and fewer tax dollars paid."

Program Administration

On September 28, 2017, the SBA's Office of Inspector General (OIG) released an audit of the SBA's administration of the Microloan program, following up on an earlier audit released on December 28, 2009. The OIG reported a number of deficiencies that it argued needed to be addressed "to ensure effective operation of the Microloan program."

In 2009, the OIG found that

the SBA's oversight of the Microloan program was focused on the intermediaries' ability to repay their SBA loans and was limited to a cursory review of quarterly financial reports supported by only one monthly bank statement. The bank statements were used to simply verify the outstanding balances reported on the intermediaries' quarterly reports. This review process did not allow the SBA to analyze the sources and uses of funds "which is necessary to detect inappropriate fund transfers between the intermediaries' [Microloan Revolving Funds and Loan Loss Reserve Funds] accounts." onsite reviews were conducted only when an intermediary defaulted on its SBA loan. the program was inadequately staffed, operating at that time "with 6 analysts who oversee more than 160 intermediaries, 460 intermediary loans, and approximately 2,500 microloans per year." the reported Microloan borrower default rate of 12% "appeared low given the high-risk nature of the program." the audit identified duplicate loan reporting and 92 Microloan borrowers with outstanding microloan balances exceeding the then-$35,000 limit. the SBA's output performance metrics "do not ensure the ultimate program beneficiaries, the microloan borrowers, are truly assisted by the program" and "without appropriate [outcome performance] metrics, SBA cannot ensure the Microloan program is meeting policy goals." The OIG recommended that the SBA "develop additional performance metrics to measure the program's achievement in assisting microloan borrowers in establishing and maintaining successful small businesses."

In its 2017 audit, the OIG found that the SBA had taken several actions (see footnote below) to improve its oversight of the Microloan program since the 2009 audit but that the agency still had "internal control weaknesses" that prevented it from conducting "adequate program oversight to measure program performance and ensure program integrity."

Specifically, the OIG audited 14 intermediary lenders and 52 microloan files and found documentation deficiencies, or differences between the information contained in the lender's loan file versus that in the SBA Microloan Program Electronic Reporting System (MPERS) in 44 of the 52 files. The OIG also argued that the audit revealed that inadequate documentation exists to show that the "no credit elsewhere" test had been properly administered; that, in some cases, inadequate supporting documentation existed to show how the microloan funds were used by the borrower; and that, in some cases, interest rates and fees were charged that exceeded the limits allowed under the program rules and regulations.

The identified internal control weaknesses

were due to the SBA not having an overall site visit plan, an adequate information system, available funding for system improvements, or clear Standard Operating Procedures (SOPs). Additionally, SBA management focused on output-based performance measures instead of outcome measures.

The OIG recommended that the SBA (1) continue efforts to improve the information system to include outcome-based performance measurements and ensure the data captured can be used to effectively monitor the Microloan Program compliance, performance, and integrity; (2) develop and implement a site visit plan to comprehensively monitor microloan portfolio performance and ensure program results can be evaluated program-wide; (3) update the Microloan program's SOP 52 00 A to clarify requirements regarding evidence for use of proceeds and credit elsewhere; and (4) update the microloan reporting system manual to reflect current technology capabilities. The SBA concurred with the four recommendations and targeted September 30, 2019, for full implementation. For example, the Microloan program's SOP 52 00 B, effective July 1, 2018, clarified requirements regarding evidence for use of proceeds and credit elsewhere.

Legislation

As mentioned previously, during the 111 th Congress, P.L. 111-240 , the Small Business Jobs Act of 2010, increased the Microloan program's loan limit for borrowers from $35,000 to $50,000, and increased the loan limit for Microloan intermediaries after their first year of participation in the program from $3.5 million to $5 million. It also temporarily allowed the SBA to waive, in whole or in part through FY2012, the nonfederal share requirement for loans to the Microloan program's intermediaries and for grants made to Microloan intermediaries for small business marketing, management, and technical assistance under specified circumstances (e.g., the economic conditions affecting the intermediary and the intermediary's performance) for up to a fiscal year.

No bills were introduced during the 112 th Congress concerning the Microloan program.

During the 113 th Congress,

H.R. 3191 , the Expanding Opportunities to Underserved Businesses Act, would have increased the Microloan program's loan limit for borrowers from $50,000 to $75,000. S. 2487 , the Access to Capital, Access to Opportunity Act, would have increased that limit to $100,000. S. 2693 , the Women's Small Business Ownership Act of 2014, and its House companion bill, H.R. 5584 , would have increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $7 million. These bills would have also removed the requirements that no more than 25% of Microloan technical assistance grant funds may be used to provi de information and technical assistance to prospective borrowers or on third-party contracts to provide the assistance.

During the 114 th Congress, as mentioned earlier,

S. 1445 , the Microloan Act of 2015, would have removed the requirements that no more than 25% of Microloan technical assistance grant funds may be used to provide information and technical assistance to prospective borrowers or on third-party contracts to provide the assistance. It would have also eliminated the Microloan program's minimum state allocation formula. H.R. 2670 , the Microloan Modernization Act of 2015, and its companion bill in the Senate ( S. 1857 ) would have increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million, increased the program's repayment terms from not more than 6 years to not more than 10 years for loans greater than $10,000, and require the SBA Administrator to establish a rule enabling intermediaries to apply for a waiver of the requirement that no more than 25% of Microloan technical assistance grant funds may be used to provide information and technical assistance to prospective borrowers. The House passed H.R. 2670 on July 13, 2015. S. 1857 was reported by the Senate Committee on Small Business and Entrepreneurship on July 29, 2015. S. 2850 , the Microloan Program Modernization Act of 2016, would have increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million; eliminated the requirements that intermediaries spend no more than 25% of Microloan technical assistance grant funds on technical assistance to prospective borrowers and no more than 25% of those funds on third-party contracts for technical assistance; required the SBA to study and report on the operations of a representative sample of Microloan intermediaries and other intermediaries and make recommendations on how to reduce costs associated with intermediaries' participation in the program and to increase intermediary participation in the program; and required the Government Accountability Office to study and report on the SBA's oversight of the program, SBA's processes to ensure intermediary compliance with program rules and regulations, and the program's overall performance.

During the 115 th Congress,

P.L. 115-141 , the Consolidated Appropriations Act, 2018, relaxed the requirements that intermediaries spend no more than 25% of Microloan technical assistance grant funds on technical assistance to prospective borrowers and no more than 25% of those funds on third-party contracts for technical assistance by increasing those percentages to 50%. These provisions were originally in H.R. 2056 , the Microloan Modernization Act of 2017, and S. 526 , its companion bill in the Senate (as amended in committee). P.L. 115-232 , the John S. McCain National Defense Authorization Act for Fiscal Year 2019, among other provisions, increased the Microloan program's aggregate loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million. These provisions were originally in H.R. 2056 , the Microloan Modernization Act of 2017, and S. 526 , its companion bill in the Senate.

Concluding Observations

During the 111 th Congress, congressional debate concerning proposed changes to the SBA's loan guaranty programs, including the Microloan program, centered on the likely impact the changes would have on small business access to capital, job retention, and job creation. As a general proposition, some, including President Obama, argued that economic conditions made it imperative that the SBA be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations and create jobs. Others worried about the long-term adverse economic effects of spending programs that increase the federal deficit. They advocated 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.

In terms of specific program changes, the provisions enacted in P.L. 111-240 (allowing the SBA to temporarily waive the Microloan program's nonfederal share matching requirements, increasing the loan limit for borrowers from $35,000 to $50,000, and increasing the loan limit for intermediaries after their first year of participation in the program from $3.5 million to $5 million), P.L. 115-141 (relaxing restraints on the use of technical assistance grants), and P.L. 115-232 (increasing the loan limit for intermediaries after their first year of participation in the program from $5 million to $6 million) are all designed to achieve the same goal: create jobs by enhancing micro borrowers' access to capital and technical training assistance.

Determining how specific changes in federal policy are most likely to lead to job creation is a challenging question. For example, a 2008 Urban Institute study concluded that differences in the term, interest rate, and amount of SBA financing "was not significantly associated with increasing sales or employment among firms receiving SBA financing." However, they also reported that their analysis accounted for less than 10% of the variation in firm performance. The Urban Institute suggested that local economic conditions, local zoning regulations, state and local tax rates, state and local business assistance programs, and the business owner's charisma or business acumen also "may play a role in determining how well a business performs after receipt of SBA financing."

As the Urban Institute study suggests, given the many factors that influence business success, measuring the SBA's Microloan program's effect on job retention and creation is complicated. That task is made even more challenging by the absence of performance-oriented measures that could serve as a guide.

The SBA's Office of Inspector General has recommended that the SBA adopt performance-oriented measures, specifically recommending that the SBA track the number of Microloan borrowers who remain in business after receiving a microloan to measure the extent to which the Microloan program contributed to their ability to stay in business. It has also recommended that the SBA require intermediaries to report the technical assistance provided to each Microloan borrower and "use this data to analyze the effect technical assistance may have on the success of Microloan borrowers and their ability to repay microloans." Other performance-oriented measures that Congress might also consider include requiring the SBA to survey Microloan borrowers to measure the difficulty they experienced in obtaining a loan from the private sector; the ease or difficulty of finding, applying, and obtaining a microloan from an intermediary; and the extent to which the microloan or technical assistance received contributed to their ability to create jobs or expand their scope of operations.

Appendix. Microloan Technical Assistance Program Funding