Federal Small Business Loans Harm Taxpayer

May 22, 2013

The United States of America was founded upon the ingenuity and hard work of small businesses. However, Small Business Administration (SBA) loans, while supposed to help small businesses, have instead become a form of corporate welfare for some of America's largest banks, says Douglas French, president of the Ludwig von Mises Institute.

Policymakers have been touting SBA loans as a stimulus for small businesses to grow the economy, but to the contrary, it has only been increasing the profits of banks while taxpayers cover the losses.  Since the financial crash in 2008, it has been hard to attain loans from private banks, but SBA loans had record years in 2011 and 2012.

The most booming portion of the program's loans is the 7(a) program that funds business loans.

  • More than $15 billion in SBA 7(a) loans was disbursed in 2010.
  • The two years after matched the booms of 2004 through 2007.
  • Per SBA guidelines, these loans were used to "to establish a new business or to assist in the operation, acquisition, or expansion of an existing business."

The question that one must ask after these statistics is: Why was there a rapid increase in only the 7(a) loans program? The answer: It has boomed because Congress has strong interest in the program.

  • This interest has been gained because small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery.
  • President Obama argued that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue or expand operations.
  • Congress and the president expect that by stimulating these small businesses, it will create jobs.

In addition to congressional support, the program boomed because of the government's guarantees on SBA loans.

  • The Small Business Act of 1953 created the 7(a) loan guarantee wherein 85 percent of a loan's principal up to $150,000 is guaranteed by the government.
  • The guarantee drops to 75 percent for loans more than $150,000.
  • During 2010 and 2011, the guarantee was bumped up to 90 percent.

The government's increase in the guarantee led to a massive increase in loan applications. This created an opportunity for companies to take out excessively high loans and not have the responsibility to pay them back, which leaves the U.S. taxpayer to pay for the business when they default on their loan.

Source: Douglas French, "Politically Correct Lending," Foundation for Economic Education, May 17, 2013.

 

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