Biden's Build Back Better social spending and climate bill may be as good as dead after Democratic senator Joe Manchin over the weekend crushed any hopes that he'd vote for the nearly $2 trillion package.

Pointing to concerns over ballooning federal debt levels, the West Virginia Senator shared in a Sunday statement that the "American people deserve transparency on the true cost of the Build Back Better Act." The bill is projected to add on roughly $160 billion to the deficit over a 10-year stretch, according to findings from the Congressional Budget Office. 

Without Manchin's support, the bill, which included billions for climate change mitigation and an enhanced child tax credit among other initiatives, would almost certainly fizzle. Not a single Republican senator has announced support of the bill, which passed the House in November. The loss of a deal is certain to have wide-ranging effects. For small businesses, the part that's liable to sting the most is the absence of the Small Business Administration's direct lending program.

A small but mighty provision in the bill would have authorized the SBA's foray into direct lending, a first for the agency outside of disaster loans. The statute was expected to set aside $2 billion for the SBA to make direct loans of $150,000 or less. That number would notch up to $1 million for small manufacturers.

Advocates of the measure saw the SBA's engagement with direct lending as a chance to expand access to capital, especially for underserved entrepreneurs and businesses from disadvantaged communities. Many businesses were sweet on it too--85 percent of small businesses said they support expanding the SBA's authority to dole out direct loans, according to a new survey from the Small Business Majority, an advocacy organization.

But to understand why this initiative was potentially necessary for small businesses, it's important to take a step back and address the problem that direct lending solves, suggests Michael Roth, a former SBA interim chief who is now a managing partner of Next Street, a small-business advisory firm. 

First consider the successes and failures of the Paycheck Protection Program, the forgivable loan program, which helped millions of small businesses access more than $800 billion in loans during the first year and a half of the pandemic. He points to an analysis released in October by New York University researchers and David Snitkof, of the financial services automation platform Ocrolus. It shows clear racial disparities in PPP lending. It is well-known at this point that banks, during the early part of the pandemic, tended to favor their own customers over non-customers and that contributed to a racial disparity in who got the forgivable loans. Black business owners were more likely to receive their PPP loans from fintech lender as opposed to a bank.

Similar trends persist in other SBA lending pipelines. During Funding Year 2021, Black-owned businesses received just 5 percent of all 7(a) loans, according to a November Congressional memo. The same memo shows that Hispanic-owned businesses received only 8 percent of all 7(a) loans. 

So, Roth suggests, leaving small-business lending entirely up to the SBA's network of privately held financial institutions may be doing a disservice to Black-owned, Latino-owned, and women-owned businesses. 

That's why he favors direct lending. As Roth sees it, the SBA's proposed direct lending model acts as a public option if businesses can't access capital through the private market. By offering direct lending, it's expected that small businesses could easily access these loans without regard to their banking relationships or their location. The latter may be an especially beneficial perk for businesses located in banking deserts for instance.

Without authorization to wade into direct lending, however, it is still possible for the SBA to continue to serve underrepresented entrepreneurs. It could, say, allow fintechs to engage in traditional SBA lending. (The PPP was the first time fintechs were offered admission into the SBA lending continuum.)

It could also welcome more smaller-dollar banks into its approved lender stable. While more than 5,000 lenders were approved to support PPP loans, around 1,800 institutions were considered active lenders prior to the pandemic. Brad Thaler, vice president of legislative affairs at the National Association of Federally Insured Credit Unions (Nafcu), a trade association, explained that loans of $150,000 or less is a sweet spot for credit union lending. And according to Nafcu's research team, 57 percent of 7(a) loans made by credit unions clocked in at under $150,000 over the past five years.

Still, credit unions make up only a meager segment of this lending arena. During Funding Year 2021, roughly 100 credit unions doled out small dollar loans totaling nearly $37 million, which is about 3 percent of all SBA's 7(a) loans under $150,000, according to the SBA. So giving them a bigger seat at the table could empower more smaller-dollar lenders to come to the aid of more underrepresented founders. 

And isn't that the point anyway? "If you look historically, you have to ask the question: Who is that program really serving? Are we serving the small businesses, or are we serving the financial institutions?" Roth says.