Ever since the Great Recession exploded on the economy in 2008, the general perception has been the government has patched up Wall Street while leaving Main Street full of potholes.
Banks were bailed out. Fannie Mae and Freddie Mac were essentially nationalized. AIG received $67.3 billion of governmental assistance. All told, 951 companies — mostly large financial institutions — received a total of $650 billion in government aid.
Main Street wasn’t so lucky. Millions of small businesses struggled to find capital as bank lending dried up. The financial crisis caused commercial loans to contract by 25% from 2009 to 2011, the second-largest percentage decrease since World War II.
And yet, the government was indeed working behind the scenes to open up lending to Main Street. The U.S. Small Business Administration was on the job.
The SBA’s Mission
The SBA was established in 1953 to offer counseling and long-term capital to America’s small businesses. Initially providing credit directly, the agency shifted to facilitating loans made by banks and other lending institutions.
The agency features two umbrella loan programs. A 504 loan is primarily for owner-occupied commercial real estate and requires a low down payment, while a 7(a) loan can be used for real estate, equipment, inventory, working capital and a host of other purposes. In either case, lenders are able to provide long-term capital at reasonable rates and fees and can take significantly more risk than with a traditional commercial loan — sometimes even financing start-ups.
SBA Lending Fell Sharply, Then Rebounded
As bad as things were for corporate America, small businesses had it much, much worse.
Despite being backed by government guarantees, 7(a) loan volume dropped 11% between 2007 and 2008, followed by a near-collapse in 2009 as it fell another 28%. 2009 saw just $9.2 billion loaned out, $6 billion less than the figure reported only four years earlier. With companies literally starving for capital, bankruptcies doubled over the same period.
Two separate stimulus packages passed by Congress helped turn the ship around. The American Recovery and Reinvestment Act of 2009 temporarily eliminated loan fees and increased bank guarantees to 90%. The Small Business Jobs Act of 2010 extended fee waivers and higher guarantees while expanding the number of eligible businesses and maximum loan size. The net result was sharp increases in SBA lending during 2010 and 2011, propelling small business lending into an upward trajectory that continues to this day.
A Victim of its Own Success
Demand for 7(a) loans has been so strong in recent years that the Small Business Administration nearly surpassed its mandated total loan limit in 2014, and temporarily breached its $18.75 billion maximum limit this month. After the program was effectively shut down for several days, the House and Senate passed a measure increasing the SBA’s cap to $23.5 billion for the remainder of the fiscal year. President Obama signed the measure into law on July 28th.
With SBA 7(a) lending restored, lenders can continue to cater to Main Street for the indefinite future.
Could a Small Business Lending Bubble Be Forming?
With the dot com and real estate bubbles blowing up so spectacularly over the past fifteen years, it’s only natural to worry that the small business sector could be overheating. Forbes recently reported that U.S. entrepreneurship reached a thirteen-year high in 2012, and has only continued to grow since then.
The chances of a small business lending bubble inflating are virtually zero. There are no assets being flipped to earn quick profits, and qualification criteria is highly regulated. Lending standards may have loosened, but regulators simply won’t allow them to dip down too far. Nor will the SBA: periodically-revised guidlines with respect to cash flow, collateral, equity and other credit factors help to ensure credit quality remains high.
The SBA’s Future
The SBA’s future has never been brighter. The agency enjoys bipartisan support in Congress, loans remain in high demand and after streamlining its products and delivery methods, the Small Business Administration is utilized by more borrowers and lenders than ever before.
A public/private partnership that actually works. Keep filling those potholes, SBA.