Opinion: Direct loans from SBA are no threat to private lenders

American Banker
October 8, 2021

By  Frank Knapp Jr.

In March of this year a campaign was launched by numerous national, state, and local business organizations to address the country’s 40-year low in new business startups. One of the recommendations was for the U.S. Small Business Administration to directly make startup and microloans of less than $20,000 in 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 $150,000 loan cap and no specified target areas.

The coalition members of our campaign, Reform the SBA: BIGGER Mission, Authority and Resources, are very supportive of this prospective SBA program, which would address access to capital, one of the most significant barriers to starting a small business, especially in rural and underserved communities that desperately need local entrepreneurship to grow their economies.

The Independent Community Bankers Association has voiced opposition to the proposed change to the SBA 7(a) program. The association’s CEO, Rebeca Romero Rainey, said, “Establishing a direct lending program to compete with 7(a) private-sector experts would needlessly risk diminishing participation in the program while putting taxpayer dollars at risk.”

As the head of a small-business advocacy organization, I agree that, generally, the government should not create programs that compete with the private sector.

However, the reality is that private lenders do not want to make small startup and microloans, especially in rural and underserved communities, and particularly to entrepreneurs of color and women. Such loans are viewed as too risky and not very profitable.

Add to this reluctance the fact that there are simply fewer private banking opportunities in rural and underserved areas.

The SBA Office of Advocacy reports that the number of commercial banks declined from 14,400 to 4,600 from 1980 through 2019, a 68% drop, due to consolidations and failures. In 2014, there were 1,132 banking ‘deserts,’ according to the St. Louis Federal Reserve Bank. More than half, 734, were in rural areas. Data from the Federal Deposit Insurance Corp. indicates that brick and mortar banking opportunities continued to decline in 2020 with over 3,300 branches closing nationally, three times as many as were opened.

Private lenders will argue that ATMs and technology make it less important to have a physical presence in underserved communities. Justin Hawkins, a region president for Wells Fargo, has said that branches are increasingly becoming “advice centers” as opposed to their former primary role as “transactional centers.”

However, the Paycheck Protection Program exposed the fallacy of the rationalization that banks can serve customers in rural and underserved communities with minimal or no presence. They certainly didn’t do this with minority small-business owners, who were largely left out of the PPP loans.

If these private lenders didn’t make the essentially no-risk small business loans to entrepreneurs of color during this federal program, it is hard to understand their concern about SBA competition for traditional 7(a) loans in rural and underserved communities today.

The ICBA also raises the concern that “taxpayer dollars” are at risk with an SBA direct lending program because “private-sector experts” would not originate such loans.

While private lenders might want us to believe that they have benevolent concern for “taxpayer dollars,” their primary goal is to make a profit. Not making small, risky loans is one way their “private-sector experts” achieve this goal. Recovering 80% or more of a failed loan through an SBA guarantee still results in a loss in both investment dollars and administrative efforts for the private lender.

But taking more risk with small-business loans is exactly what we need to lift our rural and underserved communities.

Traditional 7(a) loans are not getting this job done, whether they are originated by a private or nonprofit lender.

The nation’s 40-year low in new business startups is a testament to the need for not just doing more of the same to address this small business crisis.

I hope that the ICBA will support our campaign recommendation that SBA direct lending be targeted to startups and microbusinesses in rural and underserved communities.

Private lenders’ concern about competition will fade away and needy local communities will be in a better position to grow their economies from the bottom up thanks to the SBA direct lending.

Frank Knapp Jr., President and CEO, South Carolina Small Business Chamber of Commerce


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