Small businesses need capital, but SBA direct loans are not the answer
Small businesses have always relied on community financial institutions for their lending needs. For many small businesses, these needs are often met by credit unions and other financial institutions that operate in their own localities. These partnerships have been in place for years, if not decades, and have established a track record of success that has only grown stronger during the pandemic.
Now, some members of Congress and the Biden administration are seeking to fundamentally change that relationship and instead are pushing back on community financial institutions like credit unions and asking the Small Business Administration to lend directly to small businesses. Proponents of this idea claim that it will increase lending to small businesses, but in reality it is a flawed solution that puts taxpayers at risk and could lead to a decrease in lending to small businesses by the private sector.
Under the proposed direct lending program, the SBA would be able to offer loans of $ 150,000 or less directly to borrowers, or “through third party partnerships.” However, these are not traditional small business loans that have requirements for lenders and borrowers.
While well-intentioned, a major concern for small businesses and taxpayers is that under the program the SBA would be explicitly empowered to provide direct loans to borrowers, instead of working with experienced lenders, as has traditionally been done. been the case so far.
This proposal would inherently sever the links between small businesses and the Community financial institutions on which they depend. This would force borrowers to participate in yet another complicated and unknown federal program. Not to mention that while the SBA-backed paycheck protection program was used by many small businesses during the worst months of the pandemic, its success was largely due to the efforts of community financial institutions, which intensified during the pandemic’s worst months. this period of need help. make sure that the small family businesses on Main Street that needed small loans could get them.
Although the SBA currently has the authority to grant direct loans, the agency has rarely exercised it, with the exception of disaster loans and microcredit programs. And when the SBA exercised its power to distribute direct loans, it encountered several challenges, including high rates of fraud and default. Congress should ensure that these challenges do not resurface for small business owners and lead to a waste of taxpayer dollars, especially during a critical period of the country’s economic recovery.
If the SBA is allowed to create and distribute small business loans, it will discourage lenders from helping small businesses looking to access credit by providing financial education and other services to small business owners. Community financial institutions, such as credit unions, know their community and work with the most disadvantaged small businesses that need additional support. The SBA chasing lenders out of this space could end up giving small businesses the choice of a government loan or no loan at all.
Moreover, with the PPP forgiveness still ongoing and with the future path of the delta variant of the coronavirus uncertain, it is uncertain whether the SBA currently has the infrastructure to successfully run such a program while securing a subscription. strong and protecting both taxpayers and consumers. The SBA, in partnership with experienced community financial institutions, leverages the lending and underwriting expertise of seasoned lending staff.
Public-private partnerships like PPP illustrate how effective government assistance can be when the SBA and community financial institutions work together. Thanks to the PPP, community financial institutions were able to act quickly, with guidance from the SBA, to provide emergency funding essential to keep businesses operating.
There is undoubtedly a great need for increased availability of small loans to help small businesses, but granting direct lending authority from the SBA is not the right solution. Instead, Congress should seek ways to make it easier for community financial institutions to offer small loans to small businesses. The Member Business Loan Expansion Act, a bill introduced in the House of Representatives in September, would allow credit unions to offer small business loans under $ 100,000. This legislation has the potential to grant more access to capital to small businesses as they recover from the pandemic.
An unsuccessful interim solution would only add to the list of challenges small businesses already face. Credit unions and other community financial institutions stand ready to work with the SBA and Congress to ensure small business loan demands are met.