The future of the federal budget and the Small Business Administration

September 14, 2012 at 11:22 am 2 comments

Small businesses have had a prominent role in the rhetoric of both parties during this election season. We know about the plight of small businesses– access to capital remains tight, loans are becoming increasingly out of reach, and the large mainstream  banks are pulling away from making small loans. But for all that’s been said about small  businesses, what does any of it actually mean?  The New York Times “You’re the Boss” blog attempts to answer that today, looking specifically at the implications of reducing the federal budget.

The Small Business Administration (SBA) is required to set money aside for a loan loss reserve, or a fund that would cover any estimated losses on the loans made. Prior to the recession, this reserve was funded through fees on borrowers, but these fees have since reached a cap and can not be increased. To make up the difference, the reserve has been funded through a combination of fees and a federal subsidy since 2010. This has allowed SBA to grow and support $22 billion in small business lending.

The The House Republican budget proposal is centered on rolling back discretionary spending below 2008 levels– before the subsidy for the loan loss reserve existed. If the federal budget went back to 2008 levels, the SBA would no longer be able to legally make any loans because there would be no funding for the loan loss reserve. Unless fees are increased, which is unlikely, this could effectively be the end of small business lending by the SBA.

Given the central role of small businesses in all the campaign promises made on both sides, it would seem that eliminating the SBA would not be a wise policy decision for either party. Reducing wasteful spending is a fine goal, but scrapping an important program all together– one that supports billions of dollars in lending to businesses that would otherwise not get funded– goes far beyond “trimming the fat.” Removing $22 billion in much-needed capital would have huge impacts on small businesses and the economy as a whole.

Entry filed under: Economic Development, Economy, Small Business. Tags: , , .

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