Many experts recommend that small business owners obtain SBA loans. And, perhaps not surprisingly, the Small Business Administration (SBA) argues that the loans it guarantees are an increasingly important source of small business finance.
However, as counter-intuitive as it may sound, Small Business Administration loans aren’t an important source of financing for small businesses. SBA loans are too rare, too large, and too narrowly focused to be an important source of small business loans.
A very tiny share of small businesses receives SBA loans. This past fiscal year (which ended at in September 2011), the Small Business Administration reported that it supported just shy of 62,000 small business loans. That’s only about 0.2 percent of the approximately 27.5 million small businesses that the SBA estimates are in operation in this country. Even if we limit ourselves to the 5.9 million small businesses with employees that the agency estimates there are, SBA loans go to only 1 percent of businesses.
Compared to the share of small businesses that get other types of loans, these numbers are miniscule. Examination of the Federal Reserve’s Survey of Small Business Finances reveals that 60 percent of small businesses get trade credit, 30 percent get loans from their owners, and 41 percent have loans personally guaranteed by those running the companies. Estimates from Barlow Research, a Minneapolis-based market research firm that studies the banking industry show that one quarter of small business owners use home equity as a source of capital for their companies.
Moreover, SBA-guaranteed lending remains below pre-recession levels. True, the amount of SBA-supported lending grew from 2009 to 2010 and from 2010 to 2011, but that’s mostly because it fell so much during the financial crisis. In inflation adjusted terms, the dollar amount of SBA loans is still less than it was in the last pre-recession year – $30.5 billion in 2011 versus $31.1 billion in 2007 when measured in 2011 dollars.
SBA loans go disproportionately to new, large small businesses founded by women and minorities, research shows. A Government Accountability Office (GAO) study found that companies less than two years old are more likely than older businesses to get the loans. Analysis by Barlow Research found that bigger small businesses are more likely than smaller ones to get the loans. Finally, the GAO reports that women and minority-owned small businesses have three times the odds of getting an SBA loan than non-minority-owned small businesses.
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