To be eligible for the 7(a) loan program, a business must be an operating for-profit small firm (according to SBA’s size standards) located in the United States. To determine whether a business qualifies as small for the purposes of the 7(a) program, SBA uses size standards that it has established for each industry. SBA relies on the lenders that process and service 7(a) loans to ensure that borrowers meet the program’s eligibility requirements. In addition, lenders must certify that small businesses meet the “credit elsewhere” requirement. SBA does not extend credit to businesses if the financial strength of the individual owners or the firm itself is sufficient to provide or obtain all or part of the financing the firm needs or if the business can access conventional credit. To certify borrowers as having met the credit elsewhere requirement, lenders must first determine that the firm’s owners are unable to provide the desired funds from their personal resources. Second, lenders must determine that the business cannot secure the desired credit for similar purposes and the same period of time on reasonable terms and conditions from nonfederal sources (lending institutions) without SBA assistance, taking into account the prevailing rates and terms in the community or locale where the firm conducts business. According to SBA’s fiscal year 2003-2008 Strategic Plan, the agency’s mission is to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters. SBA describes the 7(a) program as contributing to an agencywide goal to “increase small business success by bridging competitive opportunity gaps facing entrepreneurs.” As reported annually in SBA’s Performance and Accountability Reports (PAR), the 7(a) program contributes to this strategic goal by fulfilling each of the following three long-term, agencywide objectives: increasing the positive impact of SBA assistance on the number and success of small business start-ups, maximizing the sustainability and growth of existing small businesses that receive SBA assistance, and significantly increasing successful small business ownership within segments of society that face special competitive opportunity gaps. Groups facing these special competitive opportunity gaps include those that SBA considers to own and control little productive capital and to have limited opportunities for small business ownership (such as African Americans, American Indians, Alaska Natives, Hispanics, Asians, and women) and those that are in certain rural or low-income areas. For each of its three long-term objectives, SBA collects and reports on the number of loans approved, the number of loans funded (i.e., money that was disbursed), and the number of firms assisted. Loan guarantee programs can result in subsidy costs to the federal government, and the Federal Credit Reform Act of 1990 (FCRA) requires, among other things, that agencies estimate the cost of these programs— that is, the cost of the loan guarantee to the federal government. In recognizing the difficulty of estimating credit subsidy costs and acknowledging that the eventual cost of the program may deviate from initial estimates, FCRA requires agencies to make annual revisions (reestimates) of credit subsidy costs for each cohort of loans made during a given fiscal year using new information about loan performance, revised expectations for future economic conditions and loan performance, and improvements in cash flow projection methods. These reestimates represent additional costs or savings to the government and are recorded in the budget. FCRA provides that reestimates that increase subsidy costs (upward reestimates), when they occur, be funded separately with permanent indefinite budget authority. In contrast, reestimates that reduce subsidy costs (downward reestimates) are credited to the Treasury and are unavailable to the agency. In addition, FCRA does not count administrative expenses against the appropriation for credit subsidy costs. Instead, administrative expenses are subject to separate appropriations and are recorded each year as they are paid, rather than as loans are originated. The legislative basis for the 7(a) program recognizes that the conventional lending market is the principal source of financing for small businesses and that the loan assistance that SBA provides is intended to supplement rather than compete with that market. The design of the 7(a) program has SBA collaborating with the conventional market in identifying and supplying credit to small businesses in need of assistance. Specifically, we highlight three design features of the 7(a) program that help it address concerns identified in its legislative history. First, the loan guarantee, which plays the same role as collateral, limits the lender’s risk in extending credit to a small firm. Second, the “credit elsewhere” requirement is intended to provide some assurance that guaranteed loans are offered only to firms that are unable to access credit on reasonable terms and conditions in the conventional lending market. Third, an active secondary market for the guaranteed portion of a 7(a) loan allows lenders to sell the guaranteed portion of the loan to investors, providing additional liquidity that lenders can use for additional loans. Furthermore, numerous amendments to the Small Business Act and to the 7(a) program have laid the groundwork for broadening small business ownership among certain groups, including veterans, handicapped individuals, and women, as well as among persons from historically disadvantaged groups, such as African Americans, Hispanic Americans, Native Americans, and Asian Pacific Americans. The 7(a) program also includes provisions for extending financial assistance to small businesses that are located in urban or rural areas with high proportions of unemployed or low-income individuals or that are owned by low-income individuals. The program’s legislative history highlights its role in, among other things, helping small businesses get started, allowing existing firms to expand, and enabling small businesses to develop foreign markets for their products and services. All nine performance measures we reviewed provided information that related to the 7(a) loan program’s core activity, which is to provide loan guarantees to small businesses. In particular, the indicators all provided the number of loans approved, loans funded, and firms assisted across the subgroups of small businesses the 7(a) program was intended to assist. We have stated in earlier work that a clear relationship should exist between an agency’s long-term strategic goals and its program’s performance measures. Outcome-based goals or measures showing a program’s impact on those it serves should be included in an agency’s performance plan whenever possible. However, all of the 7(a) program’s performance measures are primarily output measures. SBA does not collect any outcome-based information that discusses how well firms are doing after receiving a 7(a) loan. Further, none of the measures link directly to SBA’s long-term objectives. As a result, the performance measures do not fully support SBA’s strategic goal of increasing the success of small businesses by “bridging competitive opportunity gaps facing entrepreneurs.” SBA officials have recognized the importance of developing performance measures that better assess the 7(a) program’s impact on the small firms that receive the guaranteed loans. SBA is still awaiting a final report, originally expected sometime during the summer of 2007, from the Urban Institute, which has been contracted to undertake several evaluative studies of various SBA programs, including 7(a), that provide financial assistance to small businesses. SBA officials explained that, for several reasons, no formal decision had yet been made about how the agency might alter or enhance the current set of performance measures to provide more outcome-based information related to the 7(a) program. The reasons given included the agency’s reevaluation of its current strategic plan in response to requirements in the Government Performance and Results Act of 1993 that agencies reassess their strategic plans every 3 years, a relatively new administrator who may make changes to the agency’s performance measures and goals, and the cost and legal constraints associated with the Urban Institute study. However, SBA already collects information showing how firms are faring after they obtain a guaranteed loan. In particular, SBA regularly collects information on how well participating firms are meeting their loan obligations. This information generally includes, among other things, the number of firms that have defaulted on or prepaid their loans—data that could serve as reasonable proxies for determining a firm’s financial status. However, the agency primarily uses the data to estimate some of the costs associated with the program and for internal reporting purposes, such as monitoring participating lenders and analyzing its current loan portfolio. Using this information to expand its performance measures could provide SBA and others with helpful information about the financial status of firms that have been assisted by the 7(a) program. To better ensure that the 7(a) program is meeting its mission responsibility of helping small firms succeed through guaranteed loans, we recommended in our report that SBA complete and expand its current work on evaluating the 7(a) program’s performance measures. As part of this effort, we indicated that, at a minimum, SBA should further utilize the loan performance information it already collects, including but not limited to defaults, prepayments, and number of loans in good standing, to better report how small businesses fare after they participate in the 7(a) program. In its written response, SBA concurred with our recommendation. We found limited information from economic studies that credit constraints such as credit rationing could have some effect on small businesses in the conventional lending market. Credit rationing, or denying loans to creditworthy individuals and firms, generally stems from lenders’ uncertainty or lack of information regarding a borrower’s ability to repay debt. Economic reasoning suggests that there exists an interest rate—that is, the price of a loan—beyond which banks will not lend, even though there may be creditworthy borrowers willing to accept a higher interest rate. Because the market interest rate will not climb high enough to convince lenders to grant credit to these borrowers, these applicants will be unable to access credit and will also be left out of the lending market.