Do SBA Loans Strengthen the Economy?

SBA Loans

The stated goal of the Small Business Administration is to strengthen the American economy by strengthening small businesses. But have they been successful in this goal, or are we just playing with numbers? We’ll discuss this a bit, in today’s article.

You cannot have a discussion about funding any tax-derived program without discussing opportunity cost. It is easy to look at a program, such as the Small Business Administration, simply count the number of companies they have helped, and then declare them a success. However, this would be oversimplifying things quite a bit. It would be more accurate to ask whether the function they perform is more beneficial than the cost of the program. In other words, what is the opportunity cost of diverting funds out of the United States economy into this program?

To answer this, we have to answer some other basic questions. First, do programs funded by the Small Business Administration simply duplicate work that would be done elsewhere with private capital finance, or are they providing something that is unique?

The answer to this seems to be that they are providing something unique because private lenders are simply losing interest in lending money to new companies, entrepreneurs, and others that are on the razor’s edge of success or failure.

This brings up the final point about the usefulness of the Small Business Administration and the SBA Loans Program. Is it desirable to fund those companies that would not otherwise qualify for financing? Well, from the point of view of the banks, they are not a good bet because they default too often. On top of that, raising interest rates doesn’t really resolve that issue.

Why doesn’t raising the interest rates resolve the issue with the cost of funding new ventures? Higher rates means costlier loans, and costlier loans means more defaults. However, this cost comparison doesn’t show the whole picture, either. You must consider the total financial impact that successful ventures have on the economy. This includes new technology, more employment, etc.

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Do SBA Loans Strengthen the Economy? was last modified: October 25th, 2011 by Amit Kraidman
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