As the pandemic continues to drag on, some parties in Washington are trying to get the Small Business Administration (SBA) into the direct lending business. This initiative, in my opinion, is a terrible idea. The SBA is a government organization, not a bank or a lender. “The SBA was established in 1953 as an independent agency of the federal government to help, advise, assist and protect the interests of small businesses” and that is what it should continue to do today. Forget about parties or politics, it’s about doing the right thing for small business owners across the country.
Traditionally, the only time the SBA lends money directly is in a disaster. This is when the Economic Disaster Lending (EIDL) program is used. This program is designed to work in small, targeted areas. For example, when a tornado or hurricane hits an area and businesses need funds to rebuild. When the SBA lends itself to this title, it works relatively well. However, the program itself has been nothing short of a disaster when large-scale disasters have occurred, like Covid-19, as that is not what the program was intended for.
The SBA works best when it serves as a guarantee program, helping small businesses get loans to grow and grow their business. These loans can be used for working capital, to refinance debt, acquire a business, buy out a partner, purchase equipment, or finance owner-occupied real estate. Banks and some licensed non-bank lenders are taking advantage of the program to provide loans to businesses that would otherwise be considered too risky. A 75% SBA guarantee means that if the borrower defaults, the bank would receive 75% of the SBA. Therefore, banks only take 25% of the risk, not all 100%.
In addition to warranty programs, the SBA provides free advice and low-cost training to entrepreneurs, ensures that at least 23% of government contract dollars go to small businesses, and advocates for all small business owners. companies in the new legislation. Plus, there are even more benefits available for veterans, women, and other socially disadvantaged people who own their own businesses. Unfortunately, many entrepreneurs are still unaware of what the SBA has to offer them. In fact, while small business owners undoubtedly know more about the SBA now than before the pandemic, it’s because of the Paycheck Protection Program (PPP), which is no longer available. We must continue to raise awareness and educate about anything the SBA can do to help business owners.
If our goal is to expand SBA loans and availability, especially to underserved businesses that need smaller loans, I suggest the following. We can start doing this by simplifying the requirements for small loans. These changes would not only make it easier for small business owners, but also allow banks to make these loans much faster. As an incentive, the SBA has already reduced fees on the secured portion of their loans until September 2022.
Adding more work and responsibility to an already busy agency is not the solution. Not to mention the time and money it would take to set up such a system. If there is anything government is good at, it is certainly not speed and clarity. Let banks and licensed lenders do what they were created to do, and let the SBA continue to help small businesses in any way it can.