Probably the most urgent concern that policy makers have about small businesses in the current downturn, and the one they are best positioned to address, is access to capital. And the tool best suited to address that issue is the Small Business Administration’s 7(a) guaranteed loan program. Under normal circumstances, those 7(a) loans are counter-cyclical. When the economy slows and banks tighten credit standards, 7(a) lenders can step into the breach to offer debt financing to creditworthy small business borrowers at reduced risk to themselves. The situation in which we now find ourselves, however, is unprecedented. In short, everything that could go wrong with federally-backed small business lending has gone wrong.

The American Recovery and Reinvestment Act contains several provisions designed to jar those 7(a) lenders loose and get credit flowing to small businesses again. Specifically, the bill temporarily reduces or eliminates lender and borrower fees, increases loan guarantee amounts, and offers loans to broker-dealers so they can buy securitized SBA loans. Sounds good but will it work? It might, even if 7(a) lenders were not able to get all the fees eliminated that they wanted. But all of this begs a larger issue: the more profitable small business lending is for banks, the less helpful it is for small businesses. Or, to be more accurate, the fewer small businesses will find it helpful. This tension between loans that work for banks and loans that work for small businesses is a longstanding problem. To some degree, it will be addressed by an expansion of the scope and mission of the SBA’s Microloan program. It would probably be better, though, if legislators and program administrators recognize that the problem exists. Like other problems, this one won’t go away if we continue to ignore it.