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Small Business: Access to Capital and
Job Creation
Robert Jay Dilger
Senior Specialist in American National Government
Oscar R. Gonzales
Analyst in Economic Development Policy
May 21, 2010
Congressional Research Service
7-5700
www.crs.gov
R40985
CRS Report for Congress
P
repared for Members and Committees of Congress
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Small Business: Access to Capital and Job Creation
Summary
The Small Business Administration’s (SBA) authorization is due to expire on July 31, 2010. The
SBA administers several programs to support small businesses, including loan guarantees to
assist small businesses gain access to capital. This report addresses a core issue facing Congress
during the SBA’s reauthorization process: what, if any, additional action should the federal
government take to enhance small business access to capital?
Historically, small businesses (firms with less than 500 employees) have experienced greater job
loss during economic recessions than larger businesses. Conversely, small businesses have led job
creation during recent economic recoveries. As a result, many federal policymakers look to small
businesses to lead the nation’s recovery from its current economic difficulties. Some, including
the chairs of the House and Senate Committees on Small Business and President Obama, have
argued that current economic conditions make it imperative that the SBA be provided additional
resources to assist small businesses in acquiring capital necessary to start, continue, or expand
operations and create jobs. Others worry about the long-term adverse economic effects of
spending programs that increase the federal deficit. They advocate business tax reduction, reform
of financial credit market regulation, and federal fiscal restraint as the best means to assist small
business economic growth and job creation.
This report examines the pros and cons of federal intervention in the marketplace to enhance
small business access to capital. It assesses recent federal credit market interventions, including
the creation of the Troubled Asset Relief Program (TARP) and Term Asset-Backed Securities
Loan Facility (TALF); modifications to the SBA’s loan guarantee programs and other small
business provisions under the American Recovery and Reinvestment Act of 2009 (ARRA);
empirical evidence concerning small business lending and borrowing, including the number and
amount of small business loans guaranteed by the SBA; the efficacy of the SBA’s programs
designed to enhance small business access to capital; and two bills introduced in the 111th
Congress, H.R. 3854, the Small Business Financing and Investment Act of 2009, and S. 2869, the
Small Business Job Creation and Access to Capital Act of 2009, which are designed to enhance
small business access to capital.
This report also examines legislation to extend SBA loan modifications and fee subsidies that
were initially enacted under ARRA and are scheduled to expire on May 31, 2010, including H.R.
2847, the Jobs for Main Street Act of 2009, which would provide $325 million to extend those
loan modifications and fee subsidies through September 30, 2010, and H.R. 4213, the American
Workers, State, and Business Relief Act of 2010, which would provide $560 million to extend
those loan modifications and subsidies through December 31, 2010. It also examines President
Obama’s State of the Union proposals—the “Small Business Jobs and Wages Tax Cut” to
encourage small business job creation and wage increases and a $30 billion set-aside of TARP
funds to encourage community banks to provide small business loans; and H.R. 5297, the Small
Business Lending Fund Act of 2010, which would authorize the Secretary of the Treasury to
create a $30 billion Small Business Lending Fund to encourage community banks to provide
small business loans.
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Small Business: Access to Capital and Job Creation
Contents
Small Business Access to Capital ................................................................................................ 1
Access to Capital and Job Creation........................................................................................ 1
The Supply and Demand for Small Business Loans ............................................................... 2
The Federal Response in 2008 and Early 2009 ............................................................................ 7
The Troubled Asset Relief Program....................................................................................... 7
The Term Asset-Backed Securities Loan Facility................................................................... 8
Federal Guarantees................................................................................................................ 8
The American Recovery and Reinvestment Act of 2009 ........................................................ 9
ARRA’s SBA Funding Provisions ................................................................................... 9
ARRA’s Business Tax Provisions .................................................................................. 10
ARRA’s Credit Market Provisions................................................................................. 11
TARP, TALF, and ARRA’s Impact ....................................................................................... 12
Disagreement Over Next Steps............................................................................................ 13
Current Administration Proposals and Congressional Bills ........................................................ 14
Obama Administration Proposals ........................................................................................ 14
SBA Capital Access Programs....................................................................................... 15
Utilizing the Community Development Financial Institutions Fund ............................... 16
Small Business Tax Incentives and Utilizing TARP Funds ............................................. 16
Congressional Bills ............................................................................................................. 18
Increases in the SBA’s Loan Guarantee Limits .............................................................. 19
Extension of ARRA’s SBA Provisions ........................................................................... 20
Proposed Modifications to the SBA Microloan Program................................................ 21
SBA Direct Lending Programs ...................................................................................... 22
Concluding Observations .......................................................................................................... 24
Figures
Figure 1. Small Business Lending Environment, 1999-2009........................................................ 2
Tables
Table 1. Selected Small Business Administration Financial Statistics, FY2000-FY2010.............. 4
Contacts
Author Contact Information ...................................................................................................... 26
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Small Business: Access to Capital and Job Creation
Small Business Access to Capital
The Small Business Administration (SBA) administers several programs to support small
businesses, including loan guarantees to lenders to encourage them to provide loans to small
businesses “that might not otherwise obtain financing on reasonable terms and conditions.”1
Historically, one of the justifications presented for funding the SBA’s loan guarantee programs
has been that small businesses can be at a disadvantage, compared with other businesses, when
trying to obtain access to sufficient capital and credit.2 As an economist explained:
Growing firms need resources, but many small firms may have a hard time obtaining loans
because they are young and have little credit history. Lenders may also be reluctant to lend to
small firms with innovative products because it might be difficult to collect enough reliable
information to correctly estimate the risk for such products. If it’s true that the lending
process leaves worthy projects unfunded, some suggest that it would be good to fix this
“market failure” with government programs aimed at improving small businesses’ access to
credit.3
Congressional interest in small business access to capital has increased in recent years because, as
discussed in the following section, lending institutions have tightened small business lending
standards, largely in reaction to rising loan default rates and increased numbers of noncurrent
(past due) loans during the economic downturn. In addition, disruptions in business credit
markets during 2008 and early 2009 reduced lenders’ liquidity, making it more difficult for
lenders to supply loans to small business. The credit market disruptions’ adverse impact on
lending were particularly evident early in 2009, and remain a congressional concern.
Access to Capital and Job Creation
Small business has led job formation during previous economic recoveries.4 The tightening of
lending standards and disruption of business credit markets in 2008 and early 2009 has led to
increased concern in Congress that small businesses might be prevented from accessing sufficient
capital to enable them to take on that role during the current recovery. As the SBA indicated in its
FY2010 congressional budget justification report:
Over the last decade, small businesses across this country have been responsible for the
majority of new private sector jobs, leaving little doubt that they are a vital engine for the
nation’s economic growth. However, with the United States facing the most severe economic
1 U.S. Small Business Administration, Fiscal Year 2010 Congressional Budget Justification (Washington, DC: GPO,
2009), p. 30.
2 Proponents of providing federal funding for the SBA’s loan guarantee programs also argue that small business can
promote competitive markets. See, P.L. 83-163, § 2(a), as amended; and 15 U.S.C. § 631a.
3 Veronique de Rugy, Why the Small Business Administration’s Loan Programs Should Be Abolished, American
Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, http://www.aei.org/docLib/
20060414_wp126.pdf. Also, see U.S. Government Accountability Office, Small Business Administration: 7(a) Loan
Program Needs Additional Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11,
http://www.gao.gov/new.items/d08226t.pdf.
4 U.S. Small Business Administration, Office of Advocacy, Small Business Economic Indicators for 2003, August
2004, p. 3, http://www.sba.gov/advo/stats/sbei03.pdf; and Brian Headd, “Small Businesses Most Likely to Lead
Economic Recovery,” The Small Business Advocate, vol. 28, no. 6 (July 2009), pp. 1, 2, http://www.sba.gov/advo/
july_09.pdf.
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crisis in more than 70 years, small businesses are confronted with a frozen lending market
and limited access to the capital they need to survive and grow at this critical time.5
The Supply and Demand for Small Business Loans
Each quarter, the Federal Reserve Board surveys senior loan officers concerning their bank’s
lending practices. The survey includes a question concerning their bank’s credit standards for
small business loans: “Over the past three months, how have your bank’s credit standards for
approving applications for C&I [commercial and industrial] loans or credit lines—other than
those to be used to finance mergers and acquisitions—for small firms (annual sales of less than
$50 million) changed?” The senior loan officers are asked to indicate if their bank’s credit
standards have “Tightened considerably,” “Tightened somewhat,” “Remained basically
unchanged,” “Eased somewhat,” or “Eased considerably.” Subtracting the percentage of
respondents reporting “Eased somewhat” and “Eased considerably” from the percentage of
respondents reporting “Tightened considerably” and “Tightened somewhat” provides an
indication of the market’s supply of small business loans.
As shown in Figure 1, senior loan officers reported that they tightened small business loan credit
standards during the early part of this decade, loosened those credit standards mid-decade, and
tightened them in 2008 and 2009.
Figure 1. Small Business Lending Environment, 1999-2009
(senior loan officers’ survey responses)
Source: Federal Reserve Board, “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Washington,
DC, http://www.federalreserve.gov/boarddocs/SnLoanSurvey/, cited in Brian Headd, “Forum Seeks Solutions To
5 U.S. Small Business Administration, Fiscal Year 2010 Congressional Budget Justification (Washington, DC: GPO,
2009), p. 1.
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Thaw Frozen Small Business Credit,” The Smal Business Advocate, vol. 28, no. 10 (December 2009), p. 3,
http://www.sba.gov/advo/dec09.pdf.
The survey also includes a question concerning the demand for small business loans: “Apart from
normal seasonal variation, how has demand for C&I loans changed over the past three months for
small firms (annual sales of less than $50 million)?” Senior loan officers are asked to indicate if
demand was “Substantially stronger,” “Moderately stronger,” “About the same,” “Moderately
weaker,” or “Substantially weaker.” Subtracting the percentage of respondents reporting
“Moderately weaker” and “Substantially weaker” from the percentage of respondents reporting
“Substantially stronger” and “Moderately stronger” provides an indication of the market’s
demand for small business loans.
Also shown in Figure 1, senior loan officers reported that the demand for small business loans
declined during the early part of this decade, increased mid-decade, and declined in 2008 and
2009.
The combination of decreased supply and demand for small business loans in 2008 and 2009
caused the total amount of small business debt outstanding to decline as well. Since peaking at
$780.9 billion in the second quarter of 2008, small business total debt outstanding declined to
$760.5 billion in the third quarter of 2009.6
Table 1 provides selected financial statistics for the SBA from FY2000 to FY2010. It provides an
overview of the extent of the SBA’s various programs designed to enhance small business access
to capital. The first two columns report the amount and number of non-disaster small business
loans guaranteed by the SBA from FY2000 to FY2009 and an estimate for FY2010. The figures
for FY2000 through FY2009 reflect loans that were actually made and are less than the amount
and number of loans approved by the SBA. Each year, about 15% of the loans approved by the
SBA are subsequently cancelled, typically by the borrower.
The third column reports the volume of the SBA’s surety bond guarantees from FY2000 to
FY2009 and an estimate for FY2010. A surety bond is a three-party instrument between a surety
(someone who agrees to be responsible for the debt or obligation of another), a contractor and a
project owner. The agreement binds the contractor to comply with the terms and conditions of a
contract. If the contractor is unable to successfully perform the contract, the surety assumes the
contractor’s responsibilities and ensures that the project is completed. It is designed to reduce the
risk of contracting with small businesses that may not have the credit history or prior experience
of larger businesses. The SBA does not issue surety bonds. Instead, it provides and manages
surety bond guarantees for qualified small and emerging businesses through its Surety Bond
Guarantee (SBG) Program. The SBA reimburses a participating surety (within specified limits)
for the losses incurred as a result of a contractor’s default on a bond.7
The fourth column reports the volume of the SBA’s secondary market guarantees, which are
discussed later in this report. The final column reports the SBA’s end-of-year outstanding
principal balance of loans for FY2000-FY2009 that have not been charged off as of the end of the
fiscal year. It provides a measure of the SBA’s scope of lending.
6 Federal Deposit Insurance Corporation, “Statistics on Depository Institutions,” http://www2.fdic.gov/SDI/main.asp.
7 U.S. Small Business Administration, “Bonding Program,” http://www.sba.gov/financialassistance/borrowers/surety/.
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Table 1. Selected Small Business Administration Financial Statistics,
FY2000-FY2010
($ in millions)
Small Business Loans
Guarantee
Surety Bond
Secondary
Unpaid
Guarantee
Market
Principal
Fiscal Year
Amount Number Volume
Guarantees
Balance
2010 est.
$15,480
48,250
$1,000
$12,000
$91,536
2009 12,752 45,548 430 2,381
90,451
2008 18,168 78,916 531 4,138
88,244
2007 20,525
108,152 547 3,678
84,523
2006 19,954
105,680 508 3,633
78,117
2005 19,661
102,893 484 10,000
71,495
2004 21,308 83,611 595 3,572
64,362
2003 15,358 71,973 594 - 59,181
2002 15,281 53,585
1,672 - 56,219
2001 14,019 50,278 261 - 53,116
2000 13,180 NA
1,672 - 52,227
Sources: U.S. Small Business Administration, FY 2002 Budget Request and Performance Plan (Washington, DC:
GPO, 2001), pp. 14, 28, 31, 34; U.S. Smal Business Administration, SBA Budget Request and Performance Plan: FY
2003 Congressional Submission (Washington, DC: GPO, 2002), pp. 17, 57, 58, 62; U.S. Smal Business
Administration, FY 2004 Budget Request and Performance Plan (Washington, DC: GPO, 2003), pp. 3, 4, 113; U.S.
Smal Business Administration, FY 2005 Congressional Performance Budget Request (Washington, DC: GPO, 2004),
pp. 9, 15, 20, 82; U.S. Smal Business Administration, Congressional Submission Fiscal Year 2006 (Washington, DC:
GPO, 2005), pp. 13, 19, 25; U.S. Smal Business Administration, FY 2007 Budget Request and Performance Plan
(Washington, DC: GPO, 2006), pp. 14, 20, 23, 51, 63; U.S. Smal Business Administration, Congressional
Submission Fiscal Year 2008 (Washington, DC: GPO, 2007), pp. 17, 23, 26; 49, 52, 53, 55; U.S. Smal Business
Administration, Fiscal Year 2009 Congressional Submission and Fiscal Year 2007 Annual Performance Report
(Washington, DC: GPO, 2008), pp. 17, 25, 28, 127, 128; U.S. Smal Business Administration, Fiscal Year 2010
Congressional Budget Justification (Washington, DC: GPO, 2009), pp. 11, 17, 21, 34, 38, 43; U.S. Smal Business
Administration, “Recovery Act Changes to SBA Loan Programs Sparked Major Mid-Year Turn-Around in
Volume,” Press Release, Washington, DC, October 1, 2009; U.S. Smal Business Administration, Number of
Approved Loans by Program, FY 2009, Washington, DC, http://www.sba.gov/idc/groups/public/documents/
sba_homepage/serv_bud_lperf_approvalcount.pdf; U.S. Smal Business Administration, Unpaid Principal Balance By
Program, Washington, DC, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
serv_bud_lperf_upbreport.pdf; U.S. Smal Business Administration, Agency Financial Report, 2009 Fiscal Year,
(Washington, DC: GPO, 2009), p. 68; and U.S. Smal Business Administration, Fiscal Year 2011 Congressional
Budget Justification and FY 2009 Annual Performance Report (Washington, DC: GPO, 2010) pp. 19, 36, 39, 41, 48,
http://www.sba.gov/idc/groups/public/documents/sba_homepage/fy_2011_cbj_09_apr.pdf.
Notes: The number of loans funded for FY2009 was estimated using the historical average of 85% of the
number of loans approved in FY2009. The SBA also provides disaster loans: $8.8 billion in FY2006, $1.6 billion in
FY2007, $861 million in FY2008, and $725 million in FY2009. See U.S. Small Business Administration,
Congressional Submission Fiscal Year 2008 (Washington, DC: GPO, 2007), p. 23; and U.S. Smal Business
Administration, Fiscal Year 2009 Congressional Submission and Fiscal Year 2007 Annual Performance Report
(Washington, DC: GPO, 2008), p. 25. FY2009 disaster loan data provided to the author by the U.S. Smal
Business Administration, Office of Legislative Affairs.
As indicated in Table 1, the amount and number of non-disaster small business loans guaranteed
by the SBA declined in FY2008 and FY2009. In FY2007, the SBA guaranteed 108,152 small
business loans worth more than $20.5 billion. In FY2008, the SBA guaranteed 78,916 small
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business loans worth about $18.2 billion. In FY2009, it guaranteed an estimated 45,548 small
business loans worth approximately $12.8 billion.
In 2009, the amount of small business loans guaranteed by the SBA declined sharply early in the
year, followed by modest increases during the second and third quarters, and surpassed pre-
recession levels in the fourth quarter as small business owners took advantage of SBA loan
subsidies that were about to end. For example, during 2008, the SBA guaranteed about $348
million in small business loans per week. During the first seven weeks of 2009, the SBA
guaranteed about $165 million in small business loans per week. The amount of small business
loans guaranteed by the SBA increased modestly during the second and third quarters, averaging
about $275 million per week, increased to $1.1 billion in the third week of November as
borrowers hurried to take advantage of temporary SBA loan subsidies that were exhausted on
November 23, 2009, and then fell below pre-recession levels.8
The decline in the amount and number of small business loans guaranteed by the SBA during
2008 and 2009 were, at least in part, due to three interrelated factors. First, many lending
institutions experienced significant economic difficulties during the recession. In 2007, before the
recession, three lending institutions failed. In 2008, 26 failed. During 2009, 140 lending
institutions failed.9 Included in the list of failed lending institutions in 2009 was CIT Group, Inc.,
the nation’s largest lender to small businesses. It failed on November 1, 2009.10 Over the course
of the year, 702 (of 8,012) banks, with $403 billion in assets, were on the Federal Deposit
Insurance Corporation’s (FDIC’s) watch list for heightened risk of failure.11
Deterioration in the quality of loans and securities in the portfolios of financial institutions,
combined with rapidly rising loan defaults, also took a toll on the industry’s earnings in 2008 and
2009. In 2007, FDIC-insured lending institutions had $101.6 billion in net profits. In 2008, they
lost $12.9 billion, including a $37.8 billion loss in the fourth quarter, which more than erased
$24.9 billion in profits during the previous three quarters. In 2009, FDIC-insured lending
institutions had a net profit of $4.2 billion.12 In terms of individual lending institutions, more than
one in four (29.5%) reported a net loss for the year.13 When lending institutions anticipate
difficulty in making a profit, are losing money, or have diminished expectations of future profits,
they tend to become more risk averse and the supply of business loans, including small business
loans, tends to decline.
8 U.S. Small Business Administration, “Recovery Act Changes to SBA Loan Programs Sparked Major Mid-Year Turn-
Around in Volume,” October 1, 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
news_release_09-67.pdf; Nancy Waitz, “U.S. stimulus funds run out for lower SBA loan fees,” Reuters News,
November 24, 2009, http://www.reuters.com/article/companyNewsAndPR/idUSN2431964620091125; and Senator
Mary Landrieu, “Statements on Introduced Bills and Joint Resolutions,” remarks in the Senate, Congressional Record,
daily edition, vol. 155, no. 185 (December 10, 2009), p. S12910.
9 Federal Deposit Insurance Corporation, “Failed Bank List,” http://www.fdic.gov/bank/individual/failed/banklist.html.
For further analysis, see CRS Report RL32542, The Condition of the Banking Industry, by Walter W. Eubanks.
10 Patrice Hill, “Lender to small business bankrupt,” The Washington Post, November 2, 2009, pp. A1, A10.
11 Federal Deposit Insurance Corporation, “Quarterly Banking Profile: Fourth Quarter 2009, Table 1-A. Selected
Indicators, FDIC-Insured Institutions,” http://www2.fdic.gov/qbp/2009dec/all1a.html.
12 Federal Deposit Insurance Corporation, “Quarterly Banking Profile: Quarterly Net Income,” http://www2.fdic.gov/
qbp/2009dec/chart1.htm.
13 Federal Deposit Insurance Corporation, “Quarterly Banking Profile: Fourth Quarter 2009, Table 1-A. Selected
Indicators, FDIC-Insured Institutions,” http://www2.fdic.gov/qbp/2009dec/all1a.html. For further analysis, see CRS
Report RL32542, The Condition of the Banking Industry, by Walter W. Eubanks.
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Second, the secondary market for small business loans, as with other secondary markets, began to
contract in October 2008, reached its nadir in January 2009, and then began a relatively
prolonged recovery. In a secondary market, loans are pooled together and packaged as securities
for sale to investors. This practice makes more capital available by allowing lending institutions
to remove existing loans from their balance sheets, freeing them to make new loans.14 When
secondary credit markets constrict, lenders tend to become both less willing and less able to
supply small business loans. For example, the secondary market volume for SBA 7(a) loans
averaged $328 million a month from January 2008 through September 2008, and then fell each
succeeding month, declining to under $100 million in January 2009.15 The SBA estimates that
about half of the lenders that make SBA guaranteed loans resell them to obtain additional capital
to make additional loans.
Third, many small businesses experienced severe economic difficulties during the recession. The
SBA estimated that about 60% of the jobs lost in 2008 through the second quarter of 2009 were
lost in small firms.16 Monthly business surveys conducted by Automatic Data Processing, Inc.
(ADP) suggest that about 81% of the 7.5 million jobs lost during the recession (from December
2007 through September 2009) were in firms with less than 500 employees.17 When business is
slow, or when expectations of business sales growth are diminished, business owners (and
entrepreneurs considering starting a new small business) tend to become more risk averse and the
demand for small business loans tends to decline.
As will be shown in the discussion that follows, Congress has addressed all three of these factors.
For example, Congress authorized the U.S. Department of the Treasury to assist banks and other
lending institutions by purchasing or insuring up to $700 billion of troubled assets, targeting real
estate-related loans and securities that have lost value, are difficult to price and sell to others in
secondary markets, and, therefore, constrain the financial institution’s profits and ability to lend.18
It authorized interventions in secondary credit markets in an attempt to increase lending. It also
approved ARRA (P.L. 111-5), which was anticipated to provide $787 billion in increased
spending and tax reductions to stimulate the economy, including an additional $730 million for
SBA programs and several tax provisions designed to benefit small business. 19 In January 2010,
the Congressional Budget Office (CBO) estimated that ARRA would cost $862 billion, primarily
14 U.S. Small Business Administration, Office of Advocacy, An Exploration of a Secondary Market for Small Business
Loans, April 2003, p. 1, http://www.sba.gov/advo/research/rs227.pdf.
15 U.S. Small Business Administration, “Six-Month Recovery Act Report Card,” August 2009, http://www.sba.gov/idc/
groups/public/documents/sba_homepage/six-mnth_recov_act_rep_08_2009.pdf.
16 Brian Headd, U.S. Small Business Administration, Office of Advocacy, “An Analysis of Small Business and Jobs,”
March 2010, p. 14, http://www.sba.gov/advo/research/rs359tot.pdf.
17 Automatic Data Processing, Inc. (ADP), “National Employment Report, December 2007,” Roseland, N.J., p. 2,
http://www.adpemploymentreport.com/pdf/FINAL_Report_DEC_07.pdf; and ADP, “National Employment Report,
September 2009,” Roseland, N.J., p. 2, http://www.adpemploymentreport.com/PDF/
FINAL_Report_September_09.pdf.
18 U.S. Congress, House Committee on Financial Services, Oversight Concerns Regarding Treasury Department
Conduct of The Troubled Assets Relief Program, 110th Cong., 2nd sess., December 10, 2008 (Washington: GPO, 2009),
pp. 15, 16, 23, 27, 46, 51, 59, 63, 75, 76, 79, 91, 137, 211, 213; and “David Cho, “Treasury Kicks Off Toxic-Asset
Program: After Long Delay, Plan Is Scaled Back,” The Washington Post, October 1, 2009,
http://www.washingtonpost.com/wp-dyn/content/article/2009/09/30/AR2009093003874.html.
19 For further analysis, see CRS Report R40241, Small Business Provisions in the American Recovery and
Reinvestment Act of 2009, by N. Eric Weiss and Oscar R. Gonzales.
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due to unanticipated outlays for food stamps, unemployment compensation, and the Build
America Bond program.20
The Federal Response in 2008 and Early 2009
The Troubled Asset Relief Program
In an effort to spur the economy and assist businesses of all sizes, Congress adopted the
Emergency Economic Stabilization Act of 2008, which became law on October 3, 2008 (P.L.
110-343). The act created the Troubled Asset Relief Program (TARP), which authorizes the U.S.
Department of the Treasury to purchase or insure up to $700 billion in troubled assets from banks
and other financial institutions. The law’s intent is “to restore liquidity and stability to the
financial system of the United States.”21 The definition of troubled assets, defined as illiquid,
difficult-to-value real estate related assets in the original proposal circulated by the George W.
Bush Administration, was expanded to include any asset the Department of Treasury, in
consultation with the Federal Reserve, believes would contribute to financial instability.22 As of
January 31, 2010, the Department of the Treasury had committed $545 billion for various
purposes, including $205 billion to purchase stock in 707 banks. The largest bank stock purchases
were $40 billion for American International Group, Inc. preferred stock; $25 billion for Wells
Fargo & Company preferred stock; $25 billion for Citigroup, Inc. common stock; $20 billion for
Citigroup, Inc. preferred stock; and $20 billion for Bank of America Corporation preferred stock.
TARP has also provided General Motors, Chrysler, and their respective financing arms $76
billion in loans and equity investments.23
On March 16, 2009, President Barack Obama announced that the Department of the Treasury
would use TARP funds to purchase up to $15 billion of SBA-guaranteed loans. The purchases
were intended to “immediately unfreeze the secondary market for SBA loans and increase the
liquidity of community banks.”24 The plan was deferred after it met resistance from lenders.
Some lenders objected to TARP’s requirement that participating lenders comply with executive
compensation limits and issue warrants to the federal government. Smaller, community banks
20 U.S. Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2010 to 2020 (Washington, DC:
GPO, January 2010), p. 95, http://www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf. Note: The Build America
Bond program pays state and local governments 35% of their interest costs on taxable government bonds issued in
2009 and 2010 to finance capital spending. Participation in the program exceeded expectations. For further analysis,
see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire.
21 P.L. 110-343.
22 For further analysis, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury
Implementation, by Baird Webel and Edward V. Murphy.
23 U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report – December 2009, January
11, 2010, pp. 5, 6, 25-29, http://www.financialstability.gov/docs/105CongressionalReports/
December%20105(a)_final_1-11-10.pdf; and U.S. Department of the Treasury, Troubled Assets Relief Program
Monthly 105(a) Report – January 2010, February 16, 2010, pp. 4, 9, http://www.financialstability.gov/docs/
105CongressionalReports/January%20105(a)_2-16-10.pdf. Note: TARP made three separate investments in Citigroup
totaling $49 billion. As of January 6, 2010, 64 lending institutions had repaid their TARP funding.
24 The White House, “Remarks by the President to Small Business Owners, Community Leaders, and Members of
Congress,” March 16, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-small-business-
owners/.
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objected to the program’s paperwork requirements, such as the provision of a small-business
lending plan and quarterly reports.25
The Term Asset-Backed Securities Loan Facility
On November 25, 2008, the Federal Reserve Bank of New York, utilizing authority provided
under section 13(3) of the Federal Reserve Act, announced that it would create the Term Asset-
Backed Securities Loan Facility (TALF) to “support economic activity by facilitating renewed
issuance of consumer and business ABS [asset-backed securities].”26 TALF, which became
operative on March 3, 2009, is designed to help market participants meet the credit needs of
households and small businesses by lending up to $200 billion to eligible owners of certain AAA-
rated ABS backed by newly and recently originated auto loans, credit card loans, student loans,
and SBA-guaranteed small business loans.27 In August 2009, the Department of the Treasury and
the Federal Reserve Bank of New York announced the extension of TALF for newly issued ABS
and legacy commercial mortgage-backed securities (CMBS) through March 31, 2010. In addition,
TALF will make loans against newly issued CMBS through June 30, 2010.28
The initial TALF subscription took place on March 19, 2009, and there have been 23 monthly
ABS and CMBS subscriptions as of March 31, 2010. A total of approximately $69 billion of
TALF-eligible legacy and new ABS and CMBS issuance has been lent against.29
Federal Guarantees
In an effort to promote financial stability and, as a result, access to capital for businesses of all
sizes, the federal government has used TARP, TALF, and the FDIC to expand its role as a
guarantor of financial institution’s assets and transactions. For example, Congress temporarily
raised the maximum guaranteed value of FDIC-insured accounts from $100,000 to $250,000 per
account (P.L. 110-343, P.L. 111-22), and the FDIC also established the Debt Guarantee Program
(DGP), which guarantees the debt lending institutions issue to raise funds that they use to lend to
customers.30 To reassure anxious investors, Treasury has guaranteed that money market funds
would not fall below $1.00 per share, and Treasury, the FDIC, and the Federal Reserve Board
jointly negotiated to secure $300 billion in assets belonging to Citigroup and Bank of America.
25 Emily Flitter, “Fix for SBA Snagged by Tarp’s Exec Comp Limits,” American Banker, vol. 174, no. 61 (March 31,
2009), p. 1.
26 Federal Reserve Bank of New York, “Creation of the Term Asset-Backed Securities Loan Facility (TALF),” press
release, November 25, 2008, http://www.federalreserve.gov/newsevents/press/monetary/20081125a.htm.
27 Federal Reserve Bank of New York, “Term Asset-Backed Securities Loan Facility: Terms and Conditions,”
http://www.newyorkfed.org/markets/talf_terms.html; and Federal Reserve Bank of New York, “New York Fed releases
revised TALF Master Loan and Security Agreement and appendices,” press release, http://www.federalreserve.gov/
newsevents/press/monetary/20090303a.htm.
28 U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report – March 2010, April 12,
2010, p. 16, http://www.financialstability.gov/docs/105CongressionalReports/
March%202010%20105(a)%20monthly%20report_final.pdf.
29 Ibid.
30 P.L. 110-343 increased the deposit insurance limit to $250,000 until December 31, 2009. P.L. 111-22 made the
increase in deposit insurance effective until December 31, 2013. For further analysis, see CRS Report R40843, Bank
Failures and the Federal Deposit Insurance Corporation, by Darryl E. Getter.
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Altogether, at the height of the recession in mid-2009, the federal government was guaranteeing
or insuring more than $4.5 trillion in the face value of financial assets.31
The American Recovery and Reinvestment Act of 2009
ARRA’s SBA Funding Provisions
In an effort to help small businesses during the economic downturn Congress approved, and, on
February 17, 2009, President Obama signed into law, the American Recovery and Reinvestment
Act of 2009 (ARRA; P.L. 111-5). ARRA temporarily increased funding and modified several
SBA loan guarantee programs to make them more attractive to small business owners.
Specifically, over a two-year period, or until funding is exhausted, ARRA
• provides an additional $630 million for SBA loans and loan guarantees divided
into two categories: $375 million is set aside for reimbursements, loan subsidies
and loan modifications related to certain loans, and $255 million for loans of
$35,000 or less in a new small business stabilization program, later named the
America’s Recovery Capital (ARC) Loan program;
• provides an additional $69 million for SBA salaries and expenses, including $24
million for microloan technical assistance, and $20 million to improve lender
oversight;
• provides an additional $6 million for SBA direct loan subsidies for the microloan
program;
• provides an additional $15 million for the SBA’s surety bond program and
increases the amount of the maximum bond;
• eliminates (or reduces as much as possible) fees in the SBA’s 7(a) and 504/CDC
(Certified Development Company) business loan programs and for lender
oversight;32
• allows the SBA to guarantee certain loans that, in part, refinance existing
business loans;
• authorizes the SBA to guarantee pools of first lien 504/CDC loans sold to third
party investors;
• increases the funds (“leverage”) available to SBA-licensed Small Business
Investment Companies (SBICs);
• requires SBICs to invest at least 50% of their venture capital in low-income areas
as defined by the New Market Venture Capital program; and
• requires SBICs to make 25% of their investments in “smaller” companies.33
31 Congressional Oversight Panel, “Guarantees and Contingent Payments in TARP and Related Programs,”
Washington, DC, November 6, 2009, pp. 2-3, http://cop.senate.gov/documents/cop-110609-report.pdf.
32 The SBA guarantees certain loans made to American small businesses by commercial lenders. It is named after
Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended). The 504/CDC loan program is named after
Section 504 of the Small Business Investment Act of 1958 (P.L. 85-669), as amended, which authorized the program
33 For further analysis, see CRS Report R40241, Small Business Provisions in the American Recovery and
(continued...)
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For comparative purposes, in FY2008, the SBA had $786 million in non-disaster loan new budget
authority, so ARRA nearly doubled the amount of funding for FY2009.
The SBA estimated that ARRA funding would support $8.7 billion in 7(a) loans, $3.6 billion in
504/CDC loans, $336 million in ARC loans, and $46 million in loans to microlenders. ARRA’s
funding for the 7(a) program was exhausted on November 23, 2009. In addition, ARRA’s funding
for the 504/CDC program was about to be exhausted in late-December 2009 when Congress acted
to provide additional funds to extend the fee reductions and loan modifications. ARRA’s funding
for ARC and microlenders is expected to last until mid-2010.34
P.L. 111-118, the Department of Defense Appropriations Act, 2010, enacted on December 19,
2009, provided $125 million to extend ARRA’s “fee reductions and eliminations” for the SBA’s
7(a) and 504/CDC programs and 90% loan guarantee limit for the SBA’s 7(a) program through
February 28, 2010. P.L. 111-144, the Temporary Extension Act of 2010, enacted on March 2,
2010, provided $60 million to extend those fee reductions and loan modifications through March
28, 2010. P.L. 111-150, an act to extend the Small Business Loan Guarantee Program, enacted on
March 26, 2010, authorized the use of $40 million in SBA appropriated funds to extend those fee
reductions and loan modifications through April 30, 2010. P.L. 111-157, the Continuing
Extension Act of 2010, enacted on April 15, 2010, provided $80 million to extend those fee
reductions and loan modifications through May 31, 2010. In addition, H.R. 2847, the Jobs for
Main Street Act of 2009, approved by the House on December 16, 2009, would provide $325
million to extend the fee reductions and 90% loan guarantee limit through September 30, 2010. It
is awaiting action in the Senate. The Senate adopted H.R. 4213, the American Workers, State,
and Business Relief Act of 2010, on March 10, 2010, by a 62-36 vote. It would provide $560
million to extend the fee reductions and 90% loan guarantee limit through December 31, 2010. It
is awaiting action in the House.
ARRA’s Business Tax Provisions
ARRA also includes 11 tax provisions that have the potential to benefit small businesses in a
broad range of industries. The first five provisions listed are targeted at small businesses whereas
the others are available to businesses of all sizes:
• Extends the five-year carryback of net operating losses, which allows businesses
with $15 million or less in average annual gross receipts in the past three years to
carry back net operating losses from 2008 for up to five years instead of two
years;
• Extends through 2009 the enhanced expensing allowance, which allows
businesses to deduct up to $250,000 of the cost of eligible assets placed in
service in 2009, within certain limits;35
(...continued)
Reinvestment Act of 2009, by N. Eric Weiss and Oscar R. Gonzales; and CRS Report R40728, Small Business Tax
Benefits and the American Recovery and Reinvestment Act of 2009, by Gary Guenther.
34 Catherine Clifford, “Stimulus cash runs out for small business loans,” CNNMoney.com, November 23, 2009; and
U.S. Small Business Administration, Recovery Act Program Performance Report, November 2009,
http://www.sba.gov/idc/groups/public/documents/sba_homepage/recov_perform_reports_11_2009.pdf.
35 While there is no size limit on the firms that can benefit from the allowance, its design effectively confines its use to
smaller business firms.
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• Increases the exclusion of the gain on the sale of small business stock to 75%
(instead of 50%) of any gain realized on the sale of eligible small business stock
acquired between February 18, 2009, and December 31, 2010;
• Reduces the recognition period from 10 years to seven years for corporate tax on
sale of appreciated assets in 2009 or 2010 by S corporations that once were
organized as C corporations;
• Allows individuals who had an adjusted gross income in 2008 of less than
$500,000 and can prove that over half their income came from a small business
to base their estimated tax payments for 2009 on 90% of their tax liability for
2008;
• Temporarily extends the work opportunity credit, which permits businesses of all
sizes to claim the credit for unemployed veterans and disconnected youth in 2009
and 2010;
• Allows businesses of all sizes that buy back or exchange their own debt at a
discounted price in 2009 and 2010 to defer their discharge-of-indebtedness
income;
• Provides a credit to businesses of all sizes against employment tax payments for
employer COBRA subsidies;
• Allows businesses of all sizes that could claim a bonus depreciation allowance in
2009 to claim instead as refundable credit a portion of their unused research and
Alternative Minimum Tax (AMT) credits from tax years before 2006; and
• Increases the AMT exemption amount for joint filers to $70,950 and for single
filers to $46,700 in 2009 and extends through 2009 a rule that allows individuals
to use non-refundable personal credits to the full extent possible against the AMT
and regular income tax.36
According to the Joint Committee on Taxation, the five tax provisions targeted at small
businesses are expected to reduce small business taxes by $5.7 billion in FY2009. The six other
tax provisions that could benefit many small businesses are expected to reduce business taxes by
$52.0 billion in FY2009.37
ARRA’s Credit Market Provisions
ARRA directs the SBA to work with the Federal Reserve and Department of the Treasury to open
up the secondary credit market for small businesses. It authorizes the SBA to use emergency
rulemaking authority to issue regulations by March 19, 2009, to make below market interest rate
direct loans to SBA-designated “Systemically Important Secondary Market (SISM) Broker-
Dealers.” These broker-dealers would use the loan funds to purchase SBA-guaranteed loans from
commercial lenders, assemble them into pools, and sell them to investors in the secondary loan
36 For further analysis, see CRS Report R40728, Small Business Tax Benefits and the American Recovery and
Reinvestment Act of 2009, by Gary Guenther.
37 U.S. Congress, Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the
Conference Agreement for H.R. 1, the “American Recovery and Reinvestment Act of 2009,” JCX-19-09, February 12,
2009 (Washington, DC).
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market. ARRA also directs the SBA to create a secondary market guarantee authority for the
SBA’s 504/CDC program. The 504/CDC program provides small businesses credit for the
purchase of real estate and other fixed assets. Financing under the program includes three
components: (1) a first mortgage or lien, which is made by a private commercial lender for 50%
of the total project and does not come with a government guarantee; (2) a second mortgage or
lien, which is made by a CDC for 40% of the total project and guaranteed fully by the SBA; and
(3) borrower equity for the remaining 10% of the total project.
The SBA experienced unanticipated delays in implementing these programs due to “limited staff
resources and the need to sort out other issues related to these programs, including contracting
and Recovery Act recipient reporting requirements.”38 The SBA issued regulations for making
below market interest rate direct loans to SBA-designated SISM broker-dealers on November 19,
2009.39
The SBA published regulations to create a secondary market guarantee program for the “first
mortgage” portion of small business financing made through the 504/CDC program on October
28, 2009:
Under the new program, portions of eligible 504 first mortgages pooled by originators or
broker dealers could be sold with an SBA guarantee to third-party investors in the secondary
market. Lenders will retain at least 15 percent of each individual loan, pool originators will
assume 5 percent of the risk, and the SBA will guarantee the remaining 80 percent. To be
eligible to be included in a pool, the first mortgage must be associated with a 504 loan
disbursed on or after Feb. 17, 2009. The program will be in place until Feb. 16, 2011, or until
$3 billion in new pools are created, whichever occurs first.40
TARP, TALF, and ARRA’s Impact
Following the federal government’s interventions in business credit markets and ARRA’s
enactment, the weekly number and amount of small business loans guaranteed by the SBA began
to increase. For example, when ARRA was enacted on February 17, 2009, the SBA was averaging
about $165 million in small business loan guarantees per week. That amount rose to about $275
million per week during the second and third quarters of 2009. In addition, after ARRA, the
percentage of lending institutions tightening small business credit standards began to fall and the
decline in demand for business loans began to moderate (see Figure 1). Although the Federal
Reserve Board’s quarterly surveys of senior loan officers continued to indicate a relatively tight
credit market for small business, the trends of easing credit standards and increased demand for
small business loans during the latter half of 2009 were viewed by the SBA as a sign that the
38 U.S. Government Accountability Office, Recovery Act: Project Selection and Starts Are Influenced by Certain
Federal Requirements and Other Factors, GAO-10-383, February 10, 2010, p. 23, http://www.gao.gov/new.items/
d10383.pdf.
39 U.S. Government Accountability Office, Status of the Small Business Administration’s Implementation of
Administrative Provisions in the American Recovery and Reinvestment Act of 2009, GAO-10-298R, January 19, 2010,
pp. 6, 7, http://www.gao.gov/new.items/d10298r.pdf.
40 U.S. Small Business Administration, SBA Creates Secondary Market Guarantee Program for 504 First Mortgage
Loan Pools, October 28, 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/news_release_09-
76.pdf.
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“credit crunch may have eased somewhat” and that the market for small business loans may be
“poised for a healthier lending environment.”41
Disagreement Over Next Steps
The Obama Administration has argued that TARP, TALF, and ARRA’s additional funding for the
SBA’s loan guarantee programs have helped to improve the small business lending environment,
but additional federal action is warranted to provide small business the access to capital necessary
for increased levels of job creation.42 For example, it has proposed increasing loan guarantee
limits for the SBA’s 7(a), 504/CDC loan, and microloan programs and providing small business
greater access to credit by utilizing the Treasury Department’s Community Development
Financial Institutions (CDFI) fund and remaining TARP funds.43
As discussed in the following section, Congress is also considering bills that include provisions to
improve small business access to capital. If enacted, these bills would increase loan guarantee
limits for the SBA’s 7(a) and 504/CDC programs, but in ways different than those proposed by
the Administration and extend ARRA’s funding for SBA programs. One of the bills would also
establish a temporary SBA direct lending program, which would continue in operation or restart
should specified adverse economic conditions persist; streamline the SBA’s loan application
process; and create new lending guarantee programs targeted at specific industries.
The SBA’s critics argue, as a general principle, that increasing funding for the SBA’s loan
guarantee programs is ill-advised. In their view, the SBA has a relatively limited impact on small
business economic prospects. They argue that, in a typical year, no more than 1% of small
businesses receive an SBA-guaranteed loan, and those loans account for less than 3% of the total
amount loaned to small businesses.44 They assert that “these numbers show that the private
banking system finances most loans and that the SBA is therefore largely irrelevant in the capital
market.”45 As further evidence, they point to an October 2009 survey of owners of small
businesses employing five or fewer employees by Discover Financial Services. The survey found
that 90% of respondents reported that they have never applied for an SBA loan. When presented
with a list of several reasons why not, 48% said that they did not need an SBA loan, 15% said
they are unfamiliar with the SBA’s programs, 14% said they received funding from another
source, 9% said it takes too much time, 9% said they would rather use their personal assets, and
41 Brian Headd, “Forum Seeks Solutions To Thaw Frozen Small Business Credit,” The Small Business Advocate, vol.
28, no. 10 (December 2009), pp. 3, http://www.sba.gov/advo/dec09.pdf.
42 U.S. Small Business Administration, Recovery Act Changes to SBA Loan Programs Sparked Major Mid-Year Turn-
Around in Volume, October 1, 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
news_release_09-67.pdf; and U.S. Small Business Administration, President Obama Announces New Efforts to
Improve Access to Credit for Small Businesses, 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf.
43 The White House, “Remarks by the President on Job Creation and Economic Growth,” December 8, 2009,
http://www.whitehouse.gov/the-press-office/remarks-president-job-creation-and-economic-growth.
44 Raymond J. Keating, “Keating: Obama’s policies will hurt, not help,” Long Island Business News, The Debate
Room, October 30, 2009, http://libn.com/thedebateroom/2009/10/30/keating-obama%e2%80%99s-policies-will-hurt-
not-help/.
45 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Federal
Financial Management, Government Information, Federal Services, and International Security, The Effectiveness of the
Small Business Administration, 109th Cong., 2nd sess., April 6, 2006, S.Hrg. 109-492 (Washington: GPO, 2006), p. 92.
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6% said they have some other reason or are not sure.46 They also point to surveys of small
business firms conducted by the National Federation of Independent Business (NFIB), which
indicate that small business owners have consistently placed financing issues near the bottom of
their most pressing concerns.47 Instead of increasing federal funding for the SBA, they advocate
small business tax reduction, reform of financial credit market regulation, and federal fiscal
restraint as the best means to assist small business economic growth and job creation.48
Still others share the view of the ranking minority member on the House Committee on Small
Business, who stated at a congressional hearing on small business access to capital, held on
October 14, 2009, that he supported additional federal support for SBA programs, but tempered
expectations concerning the impact of such support. He argued that other programs have a greater
impact on small business economic prospects:
With 25 million small businesses in this country, improving the capital access program of the
SBA will not cure the credit and capital access ills through which the economy is suffering.
We must recognize that overly restrictive regulatory policies must be corrected in order to
swing the pendulum back to an appropriate middle ground for the country’s capital and
credit markets.
Congress also must not adopt policies that sap confidence of small business owners to invest
in the growth of their enterprises. Imposition of additional costs, whether it is through cap
and trade legislation or increased taxes to reform health care, will reduce confidence in small
businesses to take the economic risks needed to grow their enterprises. If Congress takes an
approach that improves access to capital in SBA programs on one hand, and then takes away
through increasing operating costs of small businesses on the other, Congress will not have
accomplished anything.49
Current Administration Proposals and
Congressional Bills
Obama Administration Proposals
On October 21, 2009, President Obama announced that the Administration’s efforts (through
ARRA and TARP) to improve small business access to capital had “made a real difference for
small businesses across America” noting that “the Recovery Act has supported over 33,000 loans
46 Discover Financial Services, “Discover® Small Business WatchSM: Small Business Economic Outlook Remains
Cautious,” Riverwoods, IL, October 26, 2009, http://investorrelations.discoverfinancial.com/phoenix.zhtml?c=
204177&p=irol-newsArticle&ID=1346088&highlight=.
47 Bruce D. Phillips and Holly Wade, Small Business Problems and Priorities (Washington, DC: NFIB Research
Foundation, June 2008), p. 5, http://www.nfib.com/Portals/0/ProblemsAndPriorities08.pdf. Note: The survey was
conducted from mid-January to March of 2008 across a randomly drawn sample of the NFIB’s 20,000 members.
Useable questionnaires were returned by 3,530 small business owners, a 17.7% response rate.
48 Susan Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” Washington, DC, October 21,
2009, http://www.nfib.com/newsroom/newsroom-item/cmsid/50080/; and NFIB, “Government Spending,”
Washington, DC, http://www.nfib.com/issues-elections/issues-elections-item/cmsid/49051/.
49 Representative Sam Graves, Opening Statement for Hearing on Increasing Access to Capital for Small Business,
October 15, 2009, http://republicans.smbiz.house.gov/News/DocumentSingle.aspx?DocumentID=150611.
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to small businesses that have already helped save or create nearly tens of thousands of jobs—
nearly $13 billion in new lending.... And more than 1,200 banks and credit unions that had
stopped issuing SBA loans when the financial crisis hit are lending again today.”50 He also
asserted that because there is “still too little credit flowing to our small businesses” and there are
“still too many entrepreneurs who can’t get the loans they need to open up their doors and start
hiring” new steps were needed “to support more lending to America’s small businesses.”51 The
President announced that “the first thing we need to do is increase the maximum size of various
SBA loans.”52
SBA Capital Access Programs
On October 21, 2009, President Obama called for legislation that would increase the loan limits
for the SBA’s 7(a) and 504/CDC loan guarantee programs. The 7(a) loan limits would be
increased from $2 million to $5 million to “help more small business owners and franchisees
grow” and the SBA’s 504/CDC loan limits would be increased from $2 million to $5 million for
standard borrowers (supporting a total project of $12.5 million) and from $4 million to $5.5
million for manufacturers (supporting a total project of $13.75 million).53 The Administration
argued that these increases would “allow small businesses to undertake larger projects.”54 In
addition, the Administration recommended that the SBA’s microloan loan limit be increased from
$35,000 to $50,000.55
On February 1, 2010, the Administration included these recommendations, and an increase in the
maximum outstanding loan amount for lenders in their first year of participation in the SBA’s
Microloan program from $750,000 to $1 million and from $3.5 million to $5 million in the
subsequent years, in its Small Business Administration FY2011 budget request to Congress.56
On February 5, 2010, the Administration proposed a temporary increase in the cap on SBA
Express loans from $350,000 to $1 million to “expand the program’s ability to help a broad range
of small businesses through a streamlined approval process” and allow the refinancing of owner-
occupied commercial real estate loans under the SBA’s 504/CDC program for “businesses with a
loan maturing in the next year who are current on all loan payments.”57 Both proposals would be
financed through fees and would not require additional appropriations.
50 The White House, “Remarks by the President On Small Business Initiatives,” October 21, 2009,
http://www.whitehouse.gov/the-press-office/remarks-president-small-business-initiatives-landover-md.
51 Ibid.
52 Ibid.
53 Ibid; and U.S. Small Business Administration, President Obama Announces New Efforts to Improve Access to Credit
for Small Businesses, October 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf.
54 U.S. Small Business Administration, President Obama Announces New Efforts to Improve Access to Credit for Small
Businesses, October 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf.
55 Ibid.
56 U.S. Office of Management and Budget, The Budget of the United States Government, Fiscal Year 2011: The
Appendix (Washington, DC: GPO, 2010), p. 1200, http://www.whitehouse.gov/omb/budget/fy2011/assets/sba.pdf.
57 The White House, “President Obama Outlines Latest in a Series of New Small Business Proposals,” February 5,
2010, http://www.whitehouse.gov/the-press-office/president-obama-outlines-latest-a-series-new-small-business-
proposals.
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Utilizing the Community Development Financial Institutions Fund
President Obama announced on October 21, 2009, that his Administration would make “more
credit available to the smaller banks and community financial institutions that [small] businesses
depend on” by using the Community Development Financial Institutions (CDFI) fund to provide
low-cost capital loans, subsidized by the Treasury Department at below-market rates (an initial
interest rate of 3% for up to five years and then increasing to 9% to encourage timely repayment),
for community banks with under $1 billion in assets.58 Banks that choose to participate in the
program will be required to submit a small business lending plan that explains “how the capital
will allow them to increase lending to small businesses.”59 Participants will also be required to
submit quarterly reports detailing their small business lending activities.
President Obama also announced on October 21, 2009, that the Treasury Department would
create an initiative to provide even lower-cost capital loans (an initial interest rate of 2% for up to
eight years and then increasing to 9% to encourage timely repayment) to certified CDFIs that
document that more than 60% of their small business lending and other economic development
activities target low-income communities or underserved populations.60 In addition, he announced
that the Treasury Department would work with community banks and the small business
community to finalize program terms “to best support small business lending” and that Treasury
Secretary Timothy Geithner and SBA Administrator Karen Mills would convene a conference “to
bring together regulators, Congressional leaders, lenders and small businesses to discuss
additional efforts that can be taken to improve the availability of credit to small businesses.”61
The conference was held on November 18, 2009.62
Small Business Tax Incentives and Utilizing TARP Funds
On December 8, 2009, President Obama proposed several tax reduction measures designed to
assist small business, including the elimination of capital gains taxes on new equity investments
in small businesses for one year (these are 75%-excluded now), a new short-term tax credit to
encourage small businesses to hire and retain employees in 2010, and an extension of ARRA’s
provision to allow businesses to deduct up to $250,000 in capital investments to 2010.63
58 U.S. Small Business Administration, President Obama Announces New Efforts to Improve Access to Credit for Small
Businesses, October 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf; and The White House, “Remarks by the President On Small Business Initiatives,”
October 21, 2009, http://www.whitehouse.gov/the-press-office/remarks-president-small-business-initiatives-landover-
md. Note: The CDFI Fund was created to promote economic revitalization and community development through
investment in and assistance to CDFIs. It was established by the Riegle Community Development and Regulatory
Improvement Act of 1994. Its FY2009 budget was $107 million. See CDFI, “About the CDFI Fund,”
http://www.cdfifund.gov/who_we_are/about_us.asp.
59 U.S. Small Business Administration, President Obama Announces New Efforts to Improve Access to Credit for Small
Businesses, October 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf.
60 Ibid.
61 Ibid.
62 U.S. Small Business Administration, Treasury, SBA Host Small Business Financing Forum, November 18, 2009,
http://www.sba.gov/idc/groups/public/documents/sba_homepage/news_release_09-80.pdf; and David Lawder,
“Geithner: Tight small business credit hurts recovery,” The Washington Post, November 18, 2009.
63 The White House, “Remarks by the President on Job Creation and Economic Growth,” December 8, 2009,
http://www.whitehouse.gov/the-press-office/remarks-president-job-creation-and-economic-growth.
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He also announced, without providing details, that, in addition to his CDFI initiative, he was
directing “my Treasury Secretary to continue mobilizing the remaining TARP funds to facilitate
lending to small businesses.”64
In his State of the Union Address on January 27, 2010, President Obama renewed his call for
small business tax incentives, proposing a tax credit for “over one million small businesses who
hire workers or raise wages,” the elimination of “all capital gains taxes on small business
investment,” and “a tax incentive for all large businesses and all small businesses to invest in new
plants and equipment.”65
The Administration’s proposed $33 billion Small Business Jobs and Wages Tax Credit would
provide businesses of all sizes a $5,000 tax credit against their payroll taxes for every net new
employee hired in 2010 who earns at least $7,000. Business start-ups would be eligible for half of
the tax credit. Businesses would also receive a bonus 6.2% tax credit on aggregate wages in
excess of inflation for reimbursement of the Social Security payroll taxes they pay on those
payroll increases. The wage bonus would be calculated off the firm’s Social Security payroll tax
base. As a result, firms would not receive a tax credit for increasing wages for employees making
more than Social Security’s current taxable maximum of $106,800. The maximum tax credit
would be limited to $500,000 per business to target the incentives to small business. To address
concerns that businesses may “seek to game the system, by, for example, replacing full-time
employees with part-time employees,” the proposal would limit “the maximum jobs tax credit
amount to 25% of the increase in a firm’s Social Security payroll wage base” and “prevent
businesses from renaming themselves or merging in order to claim the credit.”66 Employers
would have the option of receiving the tax credit on a quarterly estimated basis to “get money in
the hands of employers earlier in the year” and to “provide an early incentive to hire.”67
President Obama also proposed during his State of the Union Address to “take $30 billion of the
money Wall Street banks have repaid [to TARP] and use it to help community banks give small
businesses the credit they need to stay afloat.”68 The Administration released a “potential design”
for the program on February 2, 2010. Under the proposal, banks with less than $1 billion in assets
would be eligible to borrow up to 5% of their risk-weighted assets from the fund, and banks with
$1 billion to $10 billion in assets would be eligible to borrow up to 3% of their risk-weighted
assets from the fund. The banks would be charged a 5% dividend on the loan, but they could
64 Ibid. Note: several congressional proposals concerning the use of TARP funds for small businesses preceded
President Obama’s announcement. For example, on March 30, 2009, Senators Mary Landrieu and Olympia Snowe
wrote to Treasury Secretary Tim Geithner asking him “to consider a program that would allow the federal government
to use TARP funds to guarantee lines of credit for qualifying small businesses” and, on October 15, 2009, Senator
Mark Warner proposed combining resources from TARP, the Federal Reserve, and community-based banks to create a
$50 billion pool of money that could be used to lend to small businesses. See U.S. Senate Committee on Small
Business and Entrepreneurship, “Landrieu, Snowe call on Geithner to Stabilize Small Business Credit Lines,” press
release, March 30, 2009; and Senator Mark Warner, “A plan to expand help for small businesses,” press release,
October 15, 2009.
65 The White House, “Remarks by the President in State of the Union Address,” January 27, 2010,
http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.
66 The White House, “President Obama to Propose New Small Business Jobs and Wages Tax Cut, Fact Sheet,” January
28, 2010, http://www.whitehouse.gov/the-press-office/president-obama-propose-new-small-business-jobs-and-wages-
tax-cut.
67 Ibid.
68 The White House, “Remarks by the President in State of the Union Address,” January 27, 2010,
http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address.
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receive a 1% point decrease in their dividend rate for every 2.5% increase in incremental business
lending they achieve over a two-year period, down to a minimum dividend rate of 1%. After five
years, the dividend rate would be increased to encourage timely repayment.69
As mentioned previously, the Administration proposed in March 2009 to encourage community
banks lending to small businesses by purchasing up to $15 billion of SBA-guaranteed loans with
TARP funds. The proposal was designed to “unfreeze” the SBA-secondary loan market and
increase community banks’ liquidity.70 That proposal was deferred after it met resistance from
lenders. Some lenders objected to TARP’s requirement that participating lenders comply with
executive compensation limits and issue warrants to the federal government. Smaller, community
banks objected to the program’s paperwork requirements, such as the provision of a small-
business lending plan and quarterly reports.71 To address these concerns, the Obama
Administration proposes to transfer $30 billion in TARP funds, through legislation, to a new
program that would be distinct from TARP. As a result, banks would not face TARP restrictions,
such as those placing limitations on executive pay. Also, by “rebranding” the program, banks
would not face the stigma of taking TARP money.72
Congressional Bills
H.R. 5297, the Small Business Lending Fund Act of 2010, introduced in the House on May 13,
2010, would authorize the Secretary of the Treasury to establish a $30 billion Small Business
Lending Fund “to make capital investments” in eligible community banks with assets less than
$10 billion. Participating banks would be charged dividends or interest of 5% per annum initially,
with reduced rates available if the bank increases its small business lending. For example, if small
business lending increases by 10% or more, the dividend or interest is reduced to 1%. The bill
specifies that the Small Business Lending Fund Program “is established as separate and distinct
from the Troubled Asset Relief Program established by the Emergency Economic Stabilization
Act of 2008. An institution shall not, by virtue of a capital investment under the Small Business
Lending Fund Program, be considered a recipient of the Troubled Asset Relief Program.”
H.R. 3854, the Small Business Financing and Investment Act of 2009, was introduced in the
House by Representative Kurt Schrader on October 20, 2009. It combined language from eight
bills and was referred to the House Committee on Small Business, which reported it, by voice
vote, on October 21, 2009.73 The House passed it, 389-32, on October 29, 2009. S. 2869, the
69 The White House, “Administration Announces New $30 Billion Small Business Lending Fund,” February 2, 2010,
http://www.whitehouse.gov/sites/default/files/FACT_SHEET_Small_Business_Lending_Fund.pdf; and Damian
Paletta, “White House Plans to Lend $30 billion to Small Banks,” The Wall Street Journal, January 27, 2010. Note:
Risk-weighted assets are a bank’s assets weighted according to credit risk. Some assets, such as debentures, are
assigned a higher risk than others, such as cash or government securities/bonds.
70 The White House, “Remarks by the President to Small Business Owners, Community Leaders, and Members of
Congress,” March 16, 2009, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-small-business-
owners/.
71 Emily Flitter, “Fix for SBA Snagged by Tarp’s Exec Comp Limits,” American Banker, vol. 174, no. 61 (March 31,
2009), p. 1.
72 Damian Paletta, “White House Plans to Lend $30 billion to Small Banks,” The Wall Street Journal, January 27,
2010; Ylan Q. Mui and David Cho, “Small Business Leery of Obama’s jobs plan,” The Washington Post, January 29,
2010, p. A14; and The White House, “President Obama to Outline New Small Business Lending Fund,” February 2,
2010, http://www.whitehouse.gov/the-press-office/president-obama-outline-new-small-business-lending-fund.
73 The eight bills merged into H.R. 3854, the Small Business Financing and Investment Act of 2009, are H.R. 3723, the
(continued...)
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Small Business Job Creation and Access to Capital Act of 2009, introduced by Senator Mary
Landrieu, was reported out of the Senate Committee on Small Business and Entrepreneurship on
December 17, 2009. Both bills would increase loan limits for the SBA’s 7(a) and 504/CDC loan
guarantee programs, but in different amounts, and contain provisions designed to increase small
business’s access to capital.
Increases in the SBA’s Loan Guarantee Limits
H.R. 3854 would increase the SBA’s loan guarantee limits for 7(a) loans from $2 million to $3
million. It would also increase the SBA’s loan guarantee limits for 504/CDC loans from $2
million to $3 million for standard borrowers, from $2 million to $4 million for projects located in
a low-income community, from $4 million to $8 million for manufacturers, and for up to $10
million for projects that constitute “a major source of employment” as determined by the
Administration.74
S. 2869, similar to the Administration’s proposal, would increase the SBA’s loan guarantee limits
for 7(a) loans from $2 million to $5 million, for the SBA’s 504/CDC loans from $2 million to $5
million for standard borrowers, and from $4 million to $5.5 million for manufacturers.75 It would
also authorize the SBA to establish an alternative size standard for the SBA’s 7(a) and 504/CDC
programs that uses maximum tangible net worth and average net income as an alternative to the
use of industry standards to “help more small businesses meet the SBA’s requirements to access
SBA-backed loans.”76
Proponents argue that increasing the SBA’s loan guarantee limits may lead to greater lending to
small businesses and, as a result, create jobs and enhance economic growth.77 Critics contend that
(...continued)
Small Business Credit Expansion and Loan Markets Stabilization Act of 2009; H.R. 3739, the Job Creation and
Economic Development Through CDC Modernization Act of 2009; H.R. 3737, the Small Business Microlending
Expansion Act of 2009; H.R. 3740, the Small Business Investment Company Modernization and Improvement Act of
2009; H.R. 3722, the Enhanced New Markets and Expanded Investment in Renewable Energy for Small Manufacturers
Act of 2009; H.R. 3014, the Small Business Health Information Technology Financing Act; H.R. 3738, the Small
Business Early Stage Investment Act of 2009; and H.R. 3743, the Small Business Disaster Readiness and Reform Act
of 2009.
74 H.R. 3854, the Small Business Financing and Investment Act of 2009.
75 S. 2869, the Small Business Job Creation and Access to Capital Act of 2009.
76 Ibid; and Senator Olympia Snowe, “Statements on Introduced Bills and Joint Resolutions,” remarks in the Senate,
Congressional Record, daily edition, vol. 155, no. 185 (December 10, 2009), p. S12913. Note: S. 2869 would set, as an
interim rule upon enactment, the maximum tangible net worth of the applicant to be “not more than $15 million” and
the average net income after federal taxes for the two full fiscal years before the date of the application to be “not more
than $5 million.” For additional analysis, see CRS Report R40860, Defining Small Business: An Historical Analysis of
Contemporary Issues, by Robert Jay Dilger.
77 U.S. Small Business Administration, President Obama Announces New Efforts to Improve Access to Credit for Small
Businesses,” October 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf; U.S. Small Business Administration, Treasury, SBA Host Small Business
Financing Forum, November 18, 2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/
news_release_09-80.pdf; Senator Mary Landrieu, “Increasing Loan Limits,” remarks in the Senate, Congressional
Record, vol. 155, no. 154, October 22, 2009, p. S10696; U.S. Congress, House Committee on Small Business, Small
Business Financing and Investment Act of 2009, committee print, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-
315 (Washington: GPO, 2009), pp. 2, 13-20, 29, 31; Representative Chellie Pingree, “Providing for Consideration of
H.R. 3854, Small Business Financing and Investment Act of 2009,” House debate, Congressional Record, daily
edition, vol. 155, no. 159 (October 29, 2009), p. H12070; Representative Nydia Velázquez, “Small Business Financing
(continued...)
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increasing the SBA’s loan guarantee limits is not as important to small businesses, as a group, as
are the SBA’s upfront loan costs and interest rates, the condition of the local regional economy,
taxes, or health care costs. They also note that increasing the loan guarantee limits may reduce the
total number of loans that might be available to a larger number of small businesses if the current
loan limits were retained. They also assert that increasing the SBA’s loan guarantee limits may
lead to higher loan defaults for the SBA. 78
Extension of ARRA’s SBA Provisions
As mentioned previously, Congress has approved legislation providing $680 million to
temporarily subsidize fees for the SBA’s 7(a) and 504/CDC programs and 90% loan guarantee
limit for the SBA’s 7(a) program. The latest extension was authorized by P.L. 111-157, the
Continuing Extension Act of 2010. It provided $80 million to extend those fee reductions and
loan modifications through May 31, 2010. Also, H.R. 2847, the Jobs for Main Street Act of 2009,
passed by the House, would provide $325 million to extend those loan modifications and
subsidies through September 30, 2010, and H.R. 4213, the American Workers, State, and
Business Relief Act of 2010, passed by the Senate, would provide $354 million to extend those
loan modifications and subsidies through December 31, 2010.
In addition, H.R. 3854 would extend ARRA’s SBA loan guarantee percentage increases and fee
reductions through the end of FY2011. It would also extend ARC, with modifications, through the
end of FY2011. Under the bill, ARC’s loan guarantee limit would be increased from $35,000 to
$50,000, and to $75,000 in areas of high unemployment; the SBA is directed to establish a one-
page application for ARC loans and to study the program’s implementation to address any
impediments to lender and borrower participation in the program; and borrowers may use ARC
loans to refinance existing SBA loan debt.79 The bill would also provide 100% loan guarantees
for small business concerns owned and controlled by veterans, and expand and make permanent
the SBA’s secondary market lending authority.80
S. 2869 would extend the authorization to provide 90% guarantees on 7(a) loans and eliminate
fees for 7(a) and 504/CDC loans through December 31, 2010. It also would allow 504/CDC loans
to be used to refinance up to $4 billion in short-term commercial real estate debt each year for
(...continued)
and Investment Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009),
pp. H12074, H12075; and Representative Kurt Schrader, “Small Business Financing and Investment Act of 2009,”
House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12075, H12076.
78 Dyan Machan, “For Small Business, Borrowing Is Not So Dire,” The Wall Street Journal, September 2, 2009; Susan
Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” October 21, 2009, http://www.nfib.com/
newsroom/newsroom-item/cmsid/50080/; Joseph J. Schatz, “As Small-Business Programs Draw Fresh Attention, Some
Questions Linger,” CQToday, October 23, 2009; Mark Zandi, “Help Small Businesses Hire Again,” The New York
Times, November 3, 2009; and Representative Pete Sessions, “Providing for Consideration of H.R. 3854, Small
Business Financing and Investment Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159
(October 29, 2009), pp. H12070, H12071.
79 Note: The ARC loan program has come under some criticism, primarily for having a projected default rate in excess
of 50% and for implementation issues related to the SBA’s paperwork requirements. On November 16, 2009, Senator
Olympia Snowe introduced legislation (S. 2777) to repeal the program and return any unobligated funds to the
Treasury.
80 H.R. 3854, the Small Business Financing and Investment Act of 2009.
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two years after enactment into long-term fixed rate loans. It does not address the ARC loan
program.81
Proponents argue that extending ARRA’s SBA’s fee reductions and loan guarantee percentage for
the 7(a) program may lead to greater lending to small businesses and, as a result, create jobs and
enhance economic growth.82 Critics contend that the Administration’s proposal to use the
Treasury Department’s CDFI fund to provide low-cost capital loans, subsidized at below-market
rates, to community banks with under $1 billion in assets and the Treasury Department’s initiative
to provide low-cost capital loans to certified CDFIs that document that more than 60% of their
small business lending and other economic development activities benefit low-income
communities or underserved populations is a more targeted approach that will cost less and
achieve similar results.83 Others argue that extending SBA’s fee reductions and loan guarantee
percentage for the 7(a) program is not as important to small businesses, as a group, as are the
condition of the local regional economy, taxes, or health care costs.84
Proposed Modifications to the SBA Microloan Program
H.R. 3854 would increase the loan limits for intermediaries participating in the SBA’s microloan
program from $750,000 to $1 million in the first year of the intermediary’s participation in the
program, and from $3.5 million to $7 million in the remaining years of their participation in the
program. In addition, the SBA Administrator would be provided authority to increase the
intermediary’s loan limit up to $10 million, “if the Administrator determines, with respect to an
intermediary, that such treatment is appropriate.”85
H.R. 3854 would also modify intermediary eligibility requirements in an effort to increase
intermediary participation in the program and modify the microloan subsidy recoupment fee
exemptions to allow more small businesses to prepay their microloans without penalty.86 It would
also allow intermediaries that make loans to small businesses averaging not more than $10,000,
as opposed to the current $7,500, to provide loans that “bear an interest rate that is 2 percentage
81 S. 2869, the Small Business Job Creation and Access to Capital Act of 2009.
82 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009,
committee print, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), pp. 2, 13-20, 27,
28; Representative Ron Kind, “Providing for Consideration of H.R. 3854, Small Business Financing and Investment
Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), p. H12073; and
Representative Kurt Schrader, “Small Business Financing and Investment Act of 2009,” House debate, Congressional
Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12075, H12076.
83 The White House, “Remarks by the President On Small Business Initiatives,” October 21, 2009,
http://www.whitehouse.gov/the-press-office/remarks-president-small-business-initiatives-landover-md; and U.S. Small
Business Administration, President Obama Announces New Efforts to Improve Access to Credit for Small Businesses,
2009, http://www.sba.gov/idc/groups/public/documents/sba_homepage/sba_rcvry_new_effort_credit_sb.pdf.
84 Dyan Machan, “For Small Business, Borrowing Is Not So Dire,” The Wall Street Journal, September 2, 2009; Susan
Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” October 21, 2009, http://www.nfib.com/
newsroom/newsroom-item/cmsid/50080/; Joseph J. Schatz, “As Small-Business Programs Draw Fresh Attention, Some
Questions Linger,” CQToday, October 23, 2009; Mark Zandi, “Help Small Businesses Hire Again,” The New York
Times, November 3, 2009; and Representative Pete Sessions, “Providing for Consideration of H.R. 3854, Small
Business Financing and Investment Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159
(October 29, 2009), pp. H12070, H12071.
85 H.R. 3854, the Small Business Financing and Investment Act of 2009.
86 H.R. 3854, the Small Business Financing and Investment Act of 2009.
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points below the rate determined by the Secretary of the Treasury for obligations of the United
States with a period of maturity of 5 years, adjusted to the nearest one-eighth of 1 percent.”87
S. 2869 would increase the SBA’s microloan limits for borrowers from $35,000 to $50,000 and
increase the maximum loan made to microlender intermediaries after their first year in the
program from $3.5 million to $5 million.88
Proponents argue that increasing the SBA’s microloan limits for intermediaries and microloan
limits for borrowers may lead to greater lending to small businesses and, as a result, create jobs
and enhance economic growth.89 Critics contend that increasing the SBA’s microloan limits for
intermediaries and microloan limits for borrowers is not as important to small businesses, as a
group, as are the condition of the local regional economy, taxes, or health care costs.90
SBA Direct Lending Programs
The SBA currently has authority to make direct loans to small businesses, but, with the exception
of disaster loans, has not exercised that authority since 1994.91 Prior to 1995, the SBA made direct
loans through its general business loan program. It provided loans of up to $150,000 to small
businesses that could demonstrate an ability to repay the loans and document that they were
denied guaranteed financing from a lender, and in cities of more than 200,000 residents, from at
least two lenders. Prior to 1986, the SBA made direct loans to eligible small businesses subject to
the availability of funds. From 1986 through 1994, it made a more limited number of direct loans
under special loan programs “targeted to the needs of particular groups or types of businesses,
such as handicapped individuals and/or minority businesses.”92
H.R. 3854 would create a new, direct lending Capital Backstop program that directs the SBA to
“establish a process under which a small business concern may submit an application to the
Administrator for the purpose of securing a loan under this subsection.”93 If the Administrator
determines that the loan application meets “basic eligibility and credit standards,” the
Administrator is to make the loan available to lenders within 100 miles of the loan applicant’s
87 15 U.S.C. § 636(m).
88 S. 2869, the Small Business Job Creation and Access to Capital Act of 2009.
89 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009,
committee print, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), pp. 2, 10, 13-20,
33, 34; and Senator Mary Landrieu, “Increasing Loan Limits,” remarks in the Senate, Congressional Record, vol. 155,
no. 154, October 22, 2009, p. S10696.
90 Dyan Machan, “For Small Business, Borrowing Is Not So Dire,” The Wall Street Journal, September 2, 2009; Susan
Eckerly, “NFIB Responds to President’s Small Business Lending Initiatives,” October 21, 2009, http://www.nfib.com/
newsroom/newsroom-item/cmsid/50080/; Joseph J. Schatz, “As Small-Business Programs Draw Fresh Attention, Some
Questions Linger,” CQToday, October 23, 2009; and Mark Zandi, “Help Small Businesses Hire Again,” The New York
Times, November 3, 2009.
91 U.S. Congress, Senate Committee on Small Business, Hearing on the Proposed Fiscal Year 1995 Budget for the
Small Business Administration, 103rd Cong., 2nd sess., February 22, 1994, S. Hrg. 103-583 (Washington: GPO, 1994),
p. 20.
92 U.S. General Accounting Office, Small Business: Financial Condition of SBA’s Business Loan Portfolio Is
Improving, GAO/RCED-92-49, December 1991, pp. 14, 15, 30-34, 57-62, http://archive.gao.gov/d31t10/145560.pdf.
93 H.R. 3854, the Small Business Financing and Investment Act of 2009.
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principal office and, subsequently, to lenders in the Preferred Lenders Program. If a lender does
not agree to “originate, underwrite, close, and service the loan” the Administrator shall do so.94
The Capital Backstop program would become operational effective on the date of enactment to
September 30, 2011, and on any date afterwards if the Bureau of Economic Analysis, or successor
organization, determines that U.S. gross domestic product (GDP) has decreased for three
consecutive quarters. The program would then end when the Bureau of Economic Analysis, or
successor organization, determines that U.S. GDP has increased for two consecutive quarters. The
program would remain operative, even if U.S. GDP had increased for two consecutive quarters, if
the number of loans provided under the Capital Backstop program is at least 30% less than
provided prior to the same point in the previous fiscal year. 95
S. 2869 does not address SBA direct lending authority.
Proponents of SBA direct lending argue that the failure of several major financial firms during
2008 and the subsequent freezing of credit markets and secondary markets for securitization of
loans, tightening of lending standards, and decline in economic activity resulting in historically
high unemployment levels signal the need to create an SBA direct lending program.96 They also
contend that a direct lending program would provide “rapid access to much-needed capital
without having to face the administrative delays posed by the current Small Business
Administration (SBA) lending process.”97 Proponents also argue that a temporary SBA direct
lending program during periods of economic difficulty is necessary because
In prosperous times, small businesses are able to shop around to different lenders to find the
best available terms and conditions for a loan. But in times of economic downturns, those
same lenders aren’t as willing to lend to small businesses. More than ever during these times,
it’s the government’s responsibility to step in to help small businesses access the loans they
need to keep their businesses running and workers employed.98
Critics contend that the SBA’s mission is to augment the private sector by guaranteeing loans, not
competing with it by providing direct loans to small businesses. Although the Capital Backstop
program requires the SBA to first offer the loan to the private sector, critics worry that any
program with a direct lending component could be a precursor to the SBA competing directly
with the private sector.99 They also argue that these loans hold greater risk than most, otherwise
the private sector would accept them. They assert that SBA defaults may increase, resulting in
added expense, either to taxpayers in the form of additional appropriations or to other small
94 Ibid.
95 Ibid.
96 U.S. Congress, House Committee on Small Business, Small Business Financing and Investment Act of 2009,
committee print, 111th Cong., 1st sess., October 26, 2009, H.Rept. 111-315 (Washington: GPO, 2009), pp. 2, 13-20, 26,
27.
97 Dan Gerstein, “Big Stimulus For Small Business, A new direct lending program would benefit millions,”
Forbes.com, January 14, 2009; Sharon McLoone, “Landrieu: Small Business to Benefit from Economic Plan,” The
Washington Post, February 6, 2009; George Dooley, “ASTA Renews Call For SBA Direct Lending Program,”
American Society of Travel Agents, February 18, 2009; and Anne Kim, Ryan McConaghy, and Tess Stovall, “Federal
Direct Loans to Small Businesses,” Third Way Idea Brief, April 2009.
98 Anne Kim, Ryan McConaghy, and Tess Stovall, “Federal Direct Loans to Small Businesses,” Third Way Idea Brief,
April 2009.
99 Sue Malone, Myth: The SBA will make direct loans under the stimulus bill, Strategies For Small Business, March 12,
2009.
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business borrowers in the form of higher fees, to cover the defaults.100 The SBA stopped offering
direct loans in 1995, primarily because the subsidy rate was “10 to 15 times higher than that of
our guaranty programs.”101 Also, a Government Accountability Office (GAO) study of the SBA’s
direct lending program in 1991 found “the default percentage for guaranteed loans was only half
as great (5.3 percent) as the default percentage for direct loans (10.5 percent).”102 Since its
inception through FY2008, the SBA’s default rate is 20.4% for direct (non-disaster) loans to small
businesses and 5.0% for guaranteed loans.103
Critics also assert that providing direct loans to small businesses might invite corruption. They
note that the Reconstruction Finance Corporation (RFC), the SBA’s predecessor, made direct
loans to business and was accused of awarding loans based on the applicant’s political
connections or personal ties with RFC loan officers.104 Critics also argue that the SBA does not
have the human, physical, and technical resources to make direct loans. H.R. 3854 requires the
SBA’s Administrator to “establish a group of at least 250 individuals” to implement the Capital
Backstop program, provide them “the training necessary to carry out” the program’s activities,
and ensure that “each individual in such group with loan application evaluation and underwriting
responsibilities has at least 2 years experience with respect to such responsibilities.”105 Critics
assert that establishing a new office within the SBA to administer a direct lending program is not
as efficient or as cost-effective as relying on the private sector to make lending decisions.
Concluding Observations
Historically, small businesses (firms with less than 500 employees), especially those in the retail
and construction sectors, have experienced greater job loss during economic recessions than
larger businesses. Conversely, small businesses have led job creation during recent economic
recoveries.106 As a result, many federal policymakers look to small businesses to lead the nation’s
recovery from its current economic difficulties. As the chair of the House Committee on Small
Business stated at a 2008 congressional hearing:
There are a lot of different takes on the current financial crisis and even more opinions on
how we should dig our way out of it. But regardless of your thoughts on the matter, one thing
is very clear: Small businesses will be the key to economic turnaround. Whether it is by
100 Representative Jeff Flake, “Providing for Consideration of H.R. 3854, Small Business Financing and Investment
Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), p. H12070,
H12072.
101 U.S. Congress, Senate Committee on Small Business, Hearing on the Proposed Fiscal Year 1995 Budget for the
Small Business Administration, 103rd Cong., 2nd sess., February 22, 1994, S. Hrg. 103-583 (Washington: GPO, 1994),
p. 20.
102 U.S. General Accounting Office, Small Business: Financial Condition of SBA’s Business Loan Portfolio Is
Improving, GAO/RCED-92-49, December 1991, p. 44, http://archive.gao.gov/d31t10/145560.pdf.
103 U.S. Small Business Administration, FY2008 Small Business Administration Loss Report, p. 11,
http://www.sba.gov/idc/groups/public/documents/sba_program_office/cfo_2008_loss_report.pdf.
104 Representative Jeff Flake, “Providing for Consideration of H.R. 3854, Small Business Financing and Investment
Act of 2009,” House debate, Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12070,
H12072.
105 H.R. 3854, the Small Business Financing and Investment Act of 2009.
106 U.S. Small Business Administration, Small Business Economic Indicators for 2003, August 2004, pp. 3, 4,
http://www.sba.gov/advo/stats/sbei03.pdf.
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Small Business: Access to Capital and Job Creation
expanding the SBA role or providing targeted tax relief, entrepreneurs must have access to
all the tools they need. They have powered this country out of other recessions, and they can
do it again today. While current circumstances may be different from those in the past, the
blueprint for recovery remains the same: more jobs and greater economic growth. That is the
formula we need, and that is the formula small businesses can provide.107
The question currently being debated is not whether the federal government should act, but which
federal policies will most likely result in small business creating the most jobs. Some, including
the chairs of the House and Senate Committees on Small Business and President Obama, have
agued that current economic conditions make it imperative that the SBA be provided additional
resources to assist small businesses in acquiring capital necessary to start, continue, or expand
operations and create jobs.108 Others worry about the long-term adverse economic effects of
spending programs that increase the federal deficit. They advocate business tax reduction, reform
of financial credit market regulation, and federal fiscal restraint as the best means to assist small
business economic growth and job creation.109
Still others argue that congressional action on the SBA is largely symbolic because the SBA’s
guaranteed loan programs account for a relatively small fraction of small business lending.110
However, it also could be argued that the SBA’s loan guarantee programs purposively account for
a relatively small fraction of total small business lending because the SBA’s mission is to
augment, not supplant, the private market for small business loans. Moreover, as TARP, TALF,
and ARRA demonstrate, the authorization and oversight of the SBA’s programs is just one of
several ways Congress can influence the market for small business loans. According to this
argument, congressional action concerning the SBA should be viewed not in isolation, but as an
important part of a larger effort to enhance small business access to capital and job creation.
107 U.S. Congress, House Committee on Small Business, Creating Opportunities for Small Businesses in an Economic
Recovery, 110th Cong., 2nd sess., October 28, 2008, H. Hrg. 110-116 (Washington: GPO, 2008), p. 2.
108 Representative Nydia Velázquez, “Small Business Financing and Investment Act of 2009,” House debate,
Congressional Record, daily edition, vol. 155, no. 159 (October 29, 2009), pp. H12074, H12075; Senator Mary
Landrieu, “Statements on Introduced Bills and Joint Resolutions,” remarks in the Senate, Congressional Record, daily
edition, vol. 155, no. 185 (December 10, 2009), p. S12910; and The White House, “Remarks by the President on Job
Creation and Economic Growth,” December 8, 2009, http://www.whitehouse.gov/the-press-office/remarks-president-
job-creation-and-economic-growth.
109 National Federation of Independent Business, “Payroll Tax Holiday,” http://www.nfib.com/issues-elections/issues-
elections-item/cmsid/49039/; and NFIB, “Government Spending,” http://www.nfib.com/issues-elections/issues-
elections-item/cmsid/49051/.
110 U.S. Congress, Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Federal
Financial Management, Government Information, Federal Services, and International Security, The Effectiveness of the
Small Business Administration, 109th Cong., 2nd sess., April 6, 2006, S. Hrg. 109-492 (Washington: GPO, 2006), p. 92;
and Discover Financial Services, “Discover® Small Business WatchSM: Small Business Economic Outlook Remains
Cautious,” Riverwoods, IL, October 26, 2009, http://investorrelations.discoverfinancial.com/phoenix.zhtml?c=
204177&p=irol-newsArticle&ID=1346088&highlight=.
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Author Contact Information
Robert Jay Dilger
Oscar R. Gonzales
Senior Specialist in American National Government Analyst in Economic Development Policy
rdilger@crs.loc.gov, 7-3110
ogonzales@crs.loc.gov, 7-0764
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