SBA's 7(a) Loan Guarantee Program

An Assessment of Its Role in the Financial Market Gao ID: RCED-83-96 April 25, 1983

GAO reviewed the role of the Small Business Administration's (SBA) 7(a) Loan Guarantee Program in assisting small businesses.

GAO sent questionnaires to lenders participating in the program to determine what role the SBA guarantee plays in their small business lending practices. GAO found that the SBA guarantee is an important factor in a bank's decision to lend to new businesses and businesses with less equity than usually required. The guarantee increases a bank's ability and willingness to make larger loans because the guaranteed portion of the loan does not count against federally required lending limits. Although banks are using the program to make larger loans, only 28 percent of those interviewed believe that the guarantee limit should be raised. Losses on 7(a) guaranteed loans have been steadily increasing. SBA has not collected program demand data needed to estimate the impact of its proposed budgetary reductions on small businesses' ability to obtain long-term loans. Lenders can sell the guaranteed portion of SBA loans to investors in the secondary market and thus rapidly recover 90 percent of the funds. Concerns over inconsistencies in the way interest payments are calculated on SBA guaranteed loans, lack of timely payments, and other administrative problems have caused some investors to discontinue purchases.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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