The Obama administration has for the third consecutive year approved a smaller volume of government-backed small-business loans. But that’s not necessarily bad news.
Small Business Administration officials this past year approved federal guarantees supporting $28.6 billion in small-business loans, according to SBA figures. That’s about $1 billion short of last year’s total and down from a peak of $30.5 billion in fiscal 2011.
Under its lending programs, the agency agrees to pay back banks, credit unions and other private lenders if a borrower defaults. Generally considered the agency’s top priority, the loan programs are meant to encourage banks to provide capital to small businesses that might otherwise struggle to secure credit.
On the surface, then, the steady decline seems alarming. It’s not.
While the total dollar figure has dropped in each of the past three years, the number of loans approved for guarantees has increased in each of those years. In 2014, nearly 58,000 loan applications were approved, up from 54,106 last year and 53,848 in 2012. So, more small firms are receiving capital even though the amount they’re receiving may have shrunk.
Moreover, small-dollar loans are exactly what many small businesses have been saying they can’t get their hands on, especially in the wake of the financial crisis. Data from the Federal Deposit Insurance Corp. echoes that, showing that small commercial loans are down about 20 percent since the years preceding the recession, even as banks’ total commercial loan balances have expanded.
“For most banks, lending to small businesses, especially in the lower dollar range, is costly and risky,” Karen Mills, former SBA administrator, wrote in a recent article published by the Harvard Business School.
The crunch has led the agency to shift its focus to smaller loans — often called microloans. Starting in 2014, the agency waived all fees on loans of less than $150,000. Consequently, the number of loans approved below that threshold rose by 23 percent this year, with the volume of loans under $150,000 climbing 29 percent to $1.86 billion.
Also, a closer look at the loan numbers reveals that the agency’s recent drop in volume can be attributed to a decrease in lending through the smaller of its two signature loan programs, known as the 504 program, under which companies can finance large investments such as buildings or machinery. Meanwhile, the agency’s much larger initiative, the 7(a) program, under which funds can be used for a broad range of expenditures such as starting or expanding a company, posted record highs in terms of number of loans (52,044) and volume ($19.19 billion) this past year.
The 504 program’s lending volume, it appears, was inflated in 2011 and 2012 when Congress approved legislation permitting small businesses to temporarily refinance certain assets through the 504 initiative, which provides attractive, typically below-market rates to borrowers.
The 504 refinance program, which expired in late 2012, appeared in President Obama’s most recent budget proposal, while a bill to reinstate it has garnered support on both sides of the aisle in Congress. If approved, a rebound in 504 could push the agency’s loan volume back into record territory.