October 23, 2014

Let the Sequester Cut SBA Loan Guarantees

the sequesterThese days, the director of virtually every federal agency is writing to Congress to outline some disaster looming for its constituency as a result of the sequester that cut $85 billion from the federal budget.

The Small Business Administration (SBA) is no exception. Its former director, Karen Mills, wrote the Senate Appropriations Committee Chair, Barbara Mikulsi to tell her that the sequester would hurt small business’s access to capital by cutting the SBA’s budget for loan guarantees.

The claim is overblown. Sure the sequester will impact small business owners, just like it will affect all Americans. But the cuts to the SBA’s budget will do little to affect small business owners’ access to financing. By contrast, not letting the sequester work has the potential to do serious damage to small business credit.

Let’s start with what Ms. Mills said the sequester will do. According to the former SBA administrator, sequestration will cut $16.7 million from the SBA loan guarantee program. Yes, that’s million with an “M,” not billion with a “B.” She said the cut in the SBA loan guarantee program will force the SBA to guarantee $902 million less in loans to 1,928 fewer small businesses.

That’s barely a rounding error when it comes to small business lending. Data from the Federal Deposit Insurance Corporation (FDIC) shows that at the end of 2012 there were just shy of 1.4 million non-farm, non-residential loans of less than $1 million – a common proxy for small business lending – totaling $302 billion in outstanding debt. Even if the SBA’s estimates for the effect of the sequester aren’t inflated, it will cut the number of small business loans by 0.1 percent and the value of the loans by 0.3 percent.

The economic impact of the reduced SBA funding is even smaller than the drop in lending. The SBA estimates that 22,600 jobs would be affected by the sequester-induced drop in small business lending. That’s only 0.04 percent of small business employment.

Moreover, it’s not clear that all this employment would be lost. Some loans that typically carry SBA guarantees would be made anyway because the lenders would deem the creditors to be acceptable risks.

To justify exempting SBA loan guarantee funds from the sequester, the SBA would need to show that we are better off cutting some other government agency’s funding instead. Unfortunately, there’s no evidence of that for any metric that our elected officials consider important, from job creation to economic output.

On the other hand, the sequester itself has value. Washington has a credibility problem. The American people don’t believe that Congress and the President are serious about getting the country’s financial house in order. If the sequester cuts are reversed, and Congress and the President simply spend the money that otherwise would have been cut, they won’t look serious about cutting the deficit to the ratings agencies, like Moody’s and Standard and Poors, or our creditors, like China and Japan.

If ratings agencies respond to a failure of the sequester to stick, by cutting the federal government’s credit rating, our creditors might lose confidence in us.

A crisis of confidence would roil financial markets. If banks raised interest rates, cut access to credit, or took actions similar to what they did during the 2008 financial crisis, the effect on small business access to credit could be severe. A loss of $16.7 million in SBA loan guarantees will look like nothing in comparison to another financial crisis hitting the small business credit market.

2 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

2 Reactions

  1. We have to make tough financial decisions if we’re going to balance the budget and start paying down the debt. There’s no way to sugar coat it, so we might as well start somewhere.

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