Business as Usual?

A policy expert explains why the SBA should stop trying to stimulate the whole economy and focus on community business.

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The SBA should stop trying to stimulate the economy as a whole. Its only real leverage is in lower-income communities

Since its beginning, in 1953, the U.S. Small Business Administration has been perennially bashed as a do-nothing government agency. The Clinton administration has done much to change its reputation. Over the past two years, the SBA has revamped the 7(a) guaranty, focusing its primary loan program on smaller businesses seeking smaller loans, of less than $100,000. It has introduced several innovative programs, such as a microlending initiative and a new effort called Small Loan Express. Moreover, current administrator Phil Lader and his predecessor, Erskine Bowles, have simplified the loan-application process and reduced bureaucracy. Those reforms are as innovative as they are commendable.

Now it is time to examine whether the SBA is guaranteeing loans to the most appropriate small businesses. The agency is doing a great job of meeting the simple objective that has been laid out by Congress: make more loans available to small businesses. But SBA loans aren't likely to radically increase access to financing for a substantial segment of the small-business community. Even if the agency guarantees more than the 55,000 loans it did in fiscal year 1995, it will be assisting only a small portion of the millions of small businesses across the country.

Therefore, I am proposing a new fundamental purpose for SBA programs: economic development. By that I mean that the SBA should foster the creation and growth of small businesses in communities where jobs and basic goods and services are lacking. Those are places where market failure has occurred and where a small amount of government involvement can stimulate job creation and commercial activity significantly.

Economic development is not important only for those who live in lower-income communities. It is important for all of us. In the short term, lack of access to economic opportunity results in poorly educated workers, more crime, and greater tensions between those with resources and those without. In the long term, the isolation of the poor from economic opportunity will thin the labor force and keep low-income neighborhoods from generating the middle-class consumers and homeowners of tomorrow. Allowing such problems to persist will in the long run hurt all segments of society.

Research has shown that small businesses in minority, often lower-income neighborhoods have more difficulty getting bank financing than others do. Minority-owned businesses also have poorer access to credit than white-owned ones do. The SBA should pay more attention to such market failures. There are many examples of effective and sound small-business-lending programs run by banks, nonprofit specialized lenders, and others that have figured out how to stimulate business development in underserved communities by pulling together private and public-sector resources. In Camden, N.J., for instance, the Cooperative Business Assistance Corp. has brought banks back into the city. The SBA should learn from such programs and work harder to support small-business development in areas that are known to suffer from poor access to conventional bank credit.

Although the SBA has in recent years done a better job of serving minority-owned businesses, there has been no substantial effort -- other than the recent "One-Stop Capital Shop" program, which focuses on low-income sectors in a few targeted areas around the country -- to make it easier for businesses in lower-income communities to get loans. And there should be. A look at SBA data reveals that in the absence of an economic-development mandate, the agency merely follows and facilitates the lending patterns of regular financial institutions -- in effect subsidizing whatever patterns of bias exist in those markets. In fact, SBA data for the San Antonio area, where the SBA introduced its new, simpler LowDoc program for loans of less than $100,000, show that the number of SBA loans per business in lower-income zip codes is substantially smaller than in upper-income zip codes. And while LowDoc resulted in increased lending for all parts of metropolitan San Antonio, the increases were far greater in more affluent neighborhoods than in lower-income areas. In Chicago, the effect of LowDoc has been similar, with lending in suburban areas increasing at almost twice the rate as in the city.

There are many ways that the SBA could, with very little effort and no direct intervention in the loan process, better support the economic development of communities that truly need it. Those include expanding prequalification programs to target businesses in lower-income areas, working more with specialized community-development lenders, and offering incentives that encourage lenders to increase their attention to underserved communities. The least the agency should do is examine the performance of its participating banks and ensure that the SBA is not subsidizing lending patterns biased away from lower-income areas. Banks with clearly biased loan patterns should be warned, and if their lending patterns do not improve, they should be denied access to SBA products and incentives.

On a broad scale, there are more efficient policies that the federal government can use to improve the overall climate for small businesses' access to bank financing. Those include maintaining a low-interest-rate environment for commercial borrowers; facilitating the creation of secondary markets (such as those in the home-mortgage industry) that give lenders liquidity and increase competition among them; and ensuring that banking regulators do not overly constrain lenders who want to make small-business loans. Those approaches can improve access to credit for a broad spectrum of small businesses without requiring direct government involvement in the borrowing process.

As the federal government debates its involvement in many areas, it needs to ensure that it directs resources where they are most needed. More of the SBA's efforts should be focused on promoting basic economic opportunity for lower-income communities. If we don't make economic opportunity available in disadvantaged neighborhoods, all of us, including the entire small-business community, will be worse off. By investing government resources in the programs where they are most needed, we can get the greatest return for all of society.

Daniel Immergluck is vice-president of the Woodstock Institute, a Chicago-based nonprofit policy-research organization specializing in community and economic development.