Small businesses are the nation’s primary engine for creating jobs. In the last 15 years, they have been responsible for two out of every three net new jobs across the country. The U.S. Small Business Administration (SBA) continues to strengthen its efforts to fuel this job engine to help drive the economic recovery.
A critical focus of these efforts is on expanding access to loans to help small business owners and entrepreneurs in underserved communities start or grow their business. The SBA does this by providing a loan guarantee that helps lenders make small business loans.
Research has shown that entrepreneurs in communities that include minorities, women, people with disabilities, veterans, rural and economic disadvantaged areas have a harder time accessing capital in the conventional market. U.S. Census data shows that some of these businesses are among the fastest growing sectors of our economy, but as our nation moves out of the recent recession, we see these communities continue to lag behind other areas.
SBA has a strong record of expanding access to capital in underserved communities. A recent Urban Institute study showed minority- and women-owned entrepreneurs were three to five times more likely to receive an SBA-guaranteed loan than a conventional loan.
However, from 2008 to 2010 when the credit crunch hit, SBA-backed loans to underserved communities dropped by $800 million. While lending has rebounded in some areas, that has not been the case for these small business owners and entrepreneurs.
Turning this around is a challenge that must be tackled. Increasing the number of SBA loans in underserved communities will mean greater opportunities for small business owners and entrepreneurs to start or grow their businesses and create good-paying jobs. In turn, they will drive economic recovery in some of the hardest hit areas.
On Feb. 15, the SBA took on this challenge with two new initiatives that build on previous successes and leverage the nation’s vast network of commercial and community-based lenders. These two new initiatives are focused on increasing the number of lower dollar loans, which SBA research shows are important to small business formation and growth in underserved communities.
First, the new Small Loan Advantage program taps into SBA’s hundreds of preferred lenders, which include some of the nation’s largest lending institutions. These lenders, with thousands of local branches, reach into virtually every community in the country and have strong track-records as SBA lenders.
Small Loan Advantage provides key incentives to help these institutions ramp up their lending in underserved communities: a government guarantee of up to 85 percent for loans of $250,000 or under; and streamlined paperwork that cuts processing times for themselves and their borrowers. The latter is particularly attractive in helping make small loans more cost-effective for these lenders. Second, the Community Advantage pilot program focuses on actually expanding the number of lenders making SBA-backed loans. This program is open to community-based, mission-focused lenders, including community development financial institutions, community development companies and not-for-profit micro-lenders. These organizations have a proven track record of lending that supports economic development in underserved communities. Community Advantage builds on that success by offering government-backed loans with the same streamlined paperwork and guarantee levels available to our preferred lenders through Small Loan Advantage.
The SBA is aware that many lenders continue to face the challenge of needing to reduce risk with the limited capital they have available to make loans. Small Loan Advantage and Community Advantage are aimed at helping lenders overcome this challenge and provide more loans to small business owners and entrepreneurs.
The success of the nation’s entrepreneurs and small business owners is critical to economic recovery, especially in what have been traditionally underserved sectors of the economy. The SBA’s two new loan initiatives are putting more effective and much-needed resources in the hands of small business owners and entrepreneurs, so they can pursue their own piece of the American Dream, and in turn create good-paying jobs for people in their communities.