SBA direct loans are not a threat to private lenders
In March of this year, a campaign was launched by many national, state and local business organizations to respond to Lowest in 40 years of business creation. One of the recommendations was that the US Small Business Administration directly grant title loans and microloans under $ 20,000 to rural and underserved communities.
The House Budget Reconciliation Package proposes to give the SBA the authority and resources to make this recommendation a reality, only with a loan cap of $ 150,000 and no target area specified.
Our campaign coalition members, Reforming the SBA: GREATER Mission, Authority and Resources, strongly support this future SBA program, which would address access to capital, one of the biggest barriers to starting a small business, especially in rural and underserved communities that are in desperate need of capital. local entrepreneurship to develop their economy.
America’s independent community bankers have expressed his opposition the proposed change to the SBA 7 (a) program. Group CEO Rebeca Romero Rainey said: “Setting up a direct lending program to compete with private sector 7 (a) experts would needlessly risk reducing participation in the program while putting money away from taxpayers at risk. ”
As the head of a small business advocacy organization, I agree that in general the government should not be creating programs that compete with the private sector.
However, the reality is that private lenders don’t want to do small startups and microloans, especially in rural and underserved communities, and especially entrepreneurs of color and women. These loans are considered too risky and unprofitable.
Add to this reluctance the fact that there are simply fewer private banking opportunities in rural and underserved areas.
The SBA Advocacy Office reports that the number of commercial banks fell from 14,400 to 4,600 between 1980 and 2019, a drop of 68%, due to consolidations and defaults. In 2014, there were 1,132 banking “deserts”, according to the Federal Reserve Bank of Saint-Louis. More than half, 734, were in rural areas. Data from Federal Deposit Insurance Corporation. says physical banking opportunities continued to decline in 2020, with more than 3,300 branches closed nationwide, three times more than those opened.
Private lenders will say ATMs and technology make physical presence less important in underserved communities. Justin Hawkins, Regional President of Wells Fargo, a noted that branches are increasingly becoming ‘advice centers’ as opposed to their former main role as ‘transaction centers’.
However, the Paycheck Protection Program exposed the downsizing error that banks can serve customers in rural and underserved communities with minimal or no presence. They certainly haven’t done it with minority small business owners, who have been largely excluded from P3 loans.
While these private lenders did not provide the essentially risk-free small business loans to entrepreneurs of color during this federal program, it is difficult to understand their concern over the SBA’s competition for traditional 7 (a) loans. in rural and underserved communities today.
The ICBA is also concerned that “taxpayer dollars” are at risk with an SBA direct lending program because “private sector experts” are not believed to be behind such loans.
While private lenders may want us to believe that they really care about “taxpayers’ money”, their main goal is to make a profit. Not making small, risky loans is one way for their “private sector experts” to achieve this goal. Recovering 80% or more of a failed loan with an SBA guarantee always results in a loss of investment dollars and administrative efforts for the private lender.
But taking more risk with small business loans is exactly what we need to help our rural and underserved communities.
Traditional 7 (a) loans do not do this job, whether issued by a private or nonprofit lender.
The country’s 40-year low in business start-ups is a testament to the need not to simply do more of the same to deal with this small business crisis.
I hope ICBA will support our campaign recommendation that SBA direct loans target startups and microenterprises in rural and underserved communities.
The concerns of private lenders about competition will subside and needy local communities will be better placed to grow their economies from the bottom up through direct loans from the SBA.