The SBA loan program began in 1953, since then they have been bolstering the availability of funding to small businesses and the self-employed. Typically those who receive SBA assistance would normally not qualify for funding otherwise. The SBA does have some potentially negative issues, and we will review those in today’s article.
The biggest issue with these types of programs is that you run the risk of running money from the private sector by funneling it, via government, to areas where it may be less appropriate. Nothing illustrates this point more than the SBA Loan 7a program. They are designed for very specific kinds of companies working in specific industries, such as imports and exports. In recent years, the default rate on these loans has been as high as 7%. Most private capital funding runs a default rate of well under 5%.
Recently, there have been some private lenders that had similar problems by opening up their books to a large portfolio of small businesses, professionals, and self-employed individuals. Although some of this lending may have been well intentioned, it was ill advised. Many of these loans go into default with some lenders having default rates as high as 20% before they went bankrupt. Certainly, this weakens the strength of the whole portfolio.
Giving funds to individuals that otherwise would not qualify is certainly a noble goal of the SBA loan program. However, since we live in a world of limited resources, it is important to keep in perspective where these funds come from and how they might better be used.