How Common are Small Business Administration (SBA) Loans?

Small Business Administration (SBA) guaranteed loans get a lot of attention in Washington. President Obama, for instance, believes that “the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations”, the Congressional Research Service reports.

Many in Congress agree. Over the past several years, our legislators have passed several bills to expand SBA funding and to boost the size of the agency’s loan guarantee program, the Congressional Research Service explains.

All this attention might suggest that SBA loans are a major source of small business finance. But the data show that SBA-guaranteed loans make up a small portion of the value of small business lending, and that an even smaller fraction of U.S. businesses receive SBA loans.

The SBA’s primary loan program – the 7(a) program – is designed to help businesses that might not otherwise receive outside credit obtain loans by guaranteeing a part of the funding provided by financial institutions.

The 7(a) helps only about one percent of American businesses obtain loans. In its 2013 Congressional Budget Justification, the SBA says that it had a portfolio of 7(a) loan guarantees to “271,000 small businesses at the end of Fiscal Year 2011.” The agency’s Office of Advocacy reports (PDF) that 27.5 million US businesses were operation in 2009, the latest year for data are available. Therefore, roughly 1 percent of U.S. small businesses have outstanding 7(a) loans.

The program’s share of bank loans is of similar magnitude. Comparison of the number of 7(a) loans outstanding in 2011 with Federal Deposit Insurance Corporation (FDIC) estimates of the number of commercial and industrial loans of less than $1 million (a common proxy for small business loans) outstanding in September 2011 shows that the number of 7(a) loans was approximately 1.4 percent of the number of small business bank loans.

The fraction of U.S. businesses that have any type of SBA-guaranteed loan is very small. According to the 2007 Survey of Business Owners (SBO), conducted by the U.S. Census Bureau, only 0.3 percent of U.S. businesses, and only 0.9 percent of businesses with employees, used a “government-guaranteed business loan to finance expansion.” Because SBA-guaranteed business loans are a subset of all government-guaranteed business loans, the fraction of businesses that used an SBA-guaranteed business loan to finance expansion cannot exceed this share. By comparison, 9.0 percent of U.S. businesses and 34.2 percent of businesses with employees used a bank loan to finance expansion.

Similar numbers can be seen for start-up funding. The SBO reveals that 0.7 percent of all businesses and 1.5 percent of businesses with employees used a “government-guaranteed loan to start or acquire a business.” By comparison, 10.7 percent of all businesses and 14.5 percent of businesses with employees used a bank loan to start or acquire a business.

SBA-guaranteed loans make up a larger fraction of the value of loan portfolios than their share of loans or borrowers because SBA loans tend to be relatively large. In 2012, the “total unpaid principal balance” of the SBA’s 7(a) loan guarantee program was $59.4 billion, according to a May 2013 Congressional Research Service report (PDF). This figure amounts to 5.2 percent of the SBA’s estimate of $1.1 trillion in outstanding bank and finance company capital provided to small businesses. However, this fraction is up significantly from the 3.6 percent it composed in 2007, SBA figures reveal.

A May 2013 Congressional Research Report suggests that the value of all outstanding SBA loans make up a larger fraction of small business lending. That report indicates that the value of the SBA’s portfolio of outstanding loans was $99 billion in fiscal year 2011, amounting to 9 percent of outstanding bank and finance company capital provided to small companies. However, the SBA’s 2011 fiscal year report hints that this number includes “defaulted guarantied business loans receivable, direct disaster loans, and direct business loans receivable.” Therefore, this figure may overstate the value of the SBA’s loan portfolio.

All-in-all, SBA-guaranteed loans make up a small portion of small business finance. Their outsize attention in Washington probably reflects the fact that they are the part of small business finance system that policy makers can influence most directly.

Question Photo via Shutterstock


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.

11 Reactions

  1. Ivan Widjaya


    I personally think that guaranteed loans won’t help small businesses. “Guaranteed” gives a sense of entitlement – and that’s not good for the economy in any countries.

    Perhaps being a small portion is actually a good thing for small businesses ๐Ÿ™‚

    Just my 2 cents.

  2. The SBA doesn’t serve small businesses. It’s constituency is businesses with up to 500 employees and nearly $30 million in annual revenue, or 99.93% of all US firms, a constituency so broad as to be meaningless.

    It gets worse. Over the last four years, Karen Mills expanded the definition of “small” to include tens of thousands of more big businesses. Scott’s article reports “SBA loans tend to be relatively large”. Inclusion of all these big businesses allows the SBA to give much larger loans to fewer, but bigger businesses. In the last few years, SBA loans under $250,000 have steadily decreased, and last year the SBA backed fewer loans under $100,000 than any time in their 60-year history.

    The SBA is focused on larger businesses, and every time they back a loan to a bigger business, they create a more unlevel playing field for the smallest businesses. If the SBA were to go away, it would actually benefit the 26.5 million businesses (98% of all businesses) with 1-19 employees.

  3. My business received funding from the program that we would not have received otherwise. Small business growth is VITAL to our economy. I’m happy to hear that Obama sees the value in investing in small businesses.

  4. I can appreciate the theory Scott seems to suggest, but challenge it due to the age of his data. Sure, in 2007, when the capital markets were overheated, SBA was not the first choice of many lenders but those conditions ended shortly afterwards. What the SBO Survey data overlooks is that 75% of the 27.5 million businesses have no employees – many are hedge funds, medical PLLCs and other entities that wouldn’t need SBA assistance anyway.

    As for the FDIC call report data, it’s probably an unreliable comparison since you can’t determine when a bank has multiple loans to the same company (for several equipment leases, for example) or exactly what the size is of the borrowing company.

    Chuck also mistakenly criticizes the expansion of size standards and loan limits, but both changes were long over due to aggregate inflation and natural expansion of enterprise girth in the small business sector. The notion that SBA was solely dedicated to very small companies is not accurate, but neither have they been overlooked.

    SBA provides several options to assist financing to very small companies, many outside the 7a and 504 program. Micro loans are funded through a different channel and deliver plenty of funding through hundreds of lenders nationwide.

    Overlooked in all three critical positions above is the fact that these programs greatly assist community banks, those more inclined to assist smaller companies with more than just a credit card. Smaller banks need the credit enhancement in order to commit to a much longer loan amortization period, up to 25-years for a real estate loan. These loans are invaluable to a small business owner.

    Smaller banks also need the liquidity afforded by the SBA guarantee that allows the guaranteed portion of the loan to be sold to investors, and for the bank to plow those funds back into their communities.

    SBA did not need a bailout. It’s the only financing program that the federal government provided to help Main Street banks after the crisis, and as Joshua cites above, provides affordable financing to many companies that wouldn’t get it otherwise.

  5. Aira Bongco

    The goal may seem ideal – to help small businesses gain some capital. But this is not the case. I agree with Charles when he said that most of these go to so-called “businesses” that don’t need SBA. After all, the percentage of businesses that utilized these is way too small to state that this is even a need.

  6. Facts: Most existing small businesses get funding and loans from Alternative Lenders, not from banks or the SBA. Many times existing smaller businesses with sales of $500,000 to $5 million pay for their business with current cash flow but when the business needs short term cash to help through an unexpected expense or increase sales, they will turn to Alterative Lenders.

  7. I sold my last business thru a SBA assisted loan. It took a bit longer but enabled me to find a buyer and sell.

  8. In 2008, as credit was tightening, I was able to buy a business with the help of an SBA guaranteed loan. While the process took six weeks, it would have been much harder to get financing from the bank without the SBA. The only negative was that the closing costs on a $325,000 loan were close to $9,000. That’s pretty steep compared to non-SBA loans. Recently, I was able to refinance the $200,000 balance without the SBA at a closing cost of approximately $700.

  9. The corollary to Scott’s point that SBA-guaranteed loans make up a very small portion of small business finance is that non-bank finance companies like my firm, Business Financial Services, play an increasingly important role in funding small business. No published data exists, but we estimate that the sector overall provided about $1.5 billion of funding in 2012 and will top $3 billion in 2013, with the growth continuing. According to an article on the New York Times Small Business blog, the volume of SBA-guaranteed 7(a) loans for $150,000 has been flat at about $1.4 million per year 2009 through 2012.

  10. SBA 7(a) loans account for most long term loans made to small businesses. When comparing SBA term loans with bank CALL report term loans, SBA loans account for as much as 70% of all long term loans made to small businesses. The longer term amortization conserves precious cash flow and improves the permanent working capital of small business.

    The correlation of SBA 7(a) loan approvals with our nation’s economic performance is strong.

    Just for fun I calculated the correlation coefficient between SBA 7(a) loan volume and GDP for over six years using the Microsoft CORREL function. It came out to a statistically significant 0.86.

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