Small Business Administration
Additional Measures Needed to Assess 7(a) Loan Program's Performance Gao ID: GAO-07-769 July 13, 2007The Small Business Administration's (SBA) 7(a) program, initially established in 1953, provides loan guarantees to small businesses that cannot obtain credit in the conventional lending market. In fiscal year 2006, the program assisted more than 80,000 businesses with loan guarantees of nearly $14 billion. This report examines (1) the program's purpose, based on its legislative history, and performance measures; (2) evidence of constraints, if any, affecting small businesses' access to credit; (3) the types of small businesses served by 7(a) and conventional loans; and (4) differences in SBA's estimates and reestimates of the program's credit subsidy costs. GAO analyzed agency documents, studies on the small business lending market, and data on the characteristics of small business borrowers and loans.
As the 7(a) program's underlying statutes and legislative history suggest, the loan program is intended to help small businesses obtain credit. The program reflects this intent, in part, by guaranteeing a portion of each loan, alleviating some of the lender's risk. However, determining the program's success is difficult, as the performance measures show only outputs--the number of loans provided--and not outcomes, or the fate of the businesses borrowing with the guarantee. The agency is currently undertaking efforts to develop additional, outcome-based performance measures for the 7(a) program, but is not certain when any outcome-based measures may be introduced or what they may capture. Limited evidence from economic studies suggests that some small businesses may face constraints in accessing credit in the conventional lending market, but this evidence--which dates from the early 1970s through the early 1990s--does not account for recent developments that have occurred in the small business lending market. Several studies concluded, for example, that credit rationing--that is, when lenders do not provide loans to all creditworthy borrowers--was more likely to affect small businesses in part because these firms might not have sufficient information for lenders to assess their risk. However, the studies did not address recent significant changes to the small business lending market, such as the use of credit scoring, which may reduce the extent to which credit rationing occurs. GAO found that 7(a) loans went to certain segments of the small business lending market in higher proportions than conventional loans. A higher percentage of 7(a) loans went to minority-owned and start-up businesses compared with conventional loans from 2001 to 2004. More similar percentages of loans with and without SBA guarantees went to small businesses owned by women and those located in economically distressed neighborhoods. The characteristics of 7(a) and market loans differed in several key respects, however. For example, loans guaranteed by the 7(a) program were more likely to be larger and have variable interest rates, longer maturities, and higher interest rates. SBA's recent reestimates of the credit subsidy costs for 7(a) loans made during fiscal years 1992 through 2004 show that the long-term costs of these loans have generally been lower than the initial estimates. Since fiscal year 2005, initial estimates have shown a "zero credit subsidy." But the ultimate credit subsidy cost for any cohort of loans made will not be known until no loans are left outstanding. Reestimated costs may change because of uncertainties in forecasting and factors such as the number of loan defaults. Since 2002, the agency has employed an econometric model that incorporates historical data and other economic assumptions for its credit subsidy cost estimates and reestimates instead of relying primarily on predictions based on historical average loan performance.
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Director: Team: Phone:GAO-07-769, Small Business Administration: Additional Measures Needed to Assess 7(a) Loan Program's Performance
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Report to the Ranking Member, Subcommittee on Federal Financial
Management, Government Information, Federal Services, and International
Security, Committee on Homeland Security and Governmental Affairs, U.S.
Senate:
United States Government Accountability Office:
GAO:
July 2007:
Small Business Administration:
Additional Measures Needed to Assess 7(a) Loan Program's Performance:
GAO-07-769:
GAO Highlights:
Highlights of GAO-07-769, a report to the Ranking Member, Subcommittee
on Federal Financial Management, Government Information, Federal
Services, and International Security, Committee on Homeland Security
and Governmental Affairs, U.S. Senate
Why GAO Did This Study:
The Small Business Administration‘s (SBA) 7(a) program, initially
established in 1953, provides loan guarantees to small businesses that
cannot obtain credit in the conventional lending market. In fiscal year
2006, the program assisted more than 80,000 businesses with loan
guarantees of nearly $14 billion.
This report examines (1) the program‘s purpose, based on its
legislative history, and performance measures; (2) evidence of
constraints, if any, affecting small businesses‘ access to credit; (3)
the types of small businesses served by 7(a) and conventional loans;
and (4) differences in SBA‘s estimates and reestimates of the program‘s
credit subsidy costs. GAO analyzed agency documents, studies on the
small business lending market, and data on the characteristics of small
business borrowers and loans.
What GAO Found:
As the 7(a) program‘s underlying statutes and legislative history
suggest, the loan program is intended to help small businesses obtain
credit. The program reflects this intent, in part, by guaranteeing a
portion of each loan, alleviating some of the lender‘s risk. However,
determining the program‘s success is difficult, as the performance
measures show only outputs”the number of loans provided”and not
outcomes, or the fate of the businesses borrowing with the guarantee.
The agency is currently undertaking efforts to develop additional,
outcome-based performance measures for the 7(a) program, but is not
certain when any outcome-based measures may be introduced or what they
may capture.
Limited evidence from economic studies suggests that some small
businesses may face constraints in accessing credit in the conventional
lending market, but this evidence”which dates from the early 1970s
through the early 1990s”does not account for recent developments that
have occurred in the small business lending market. Several studies
concluded, for example, that credit rationing”that is, when lenders do
not provide loans to all creditworthy borrowers”was more likely to
affect small businesses in part because these firms might not have
sufficient information for lenders to assess their risk. However, the
studies did not address recent significant changes to the small
business lending market, such as the use of credit scoring, which may
reduce the extent to which credit rationing occurs.
GAO found that 7(a) loans went to certain segments of the small
business lending market in higher proportions than conventional loans.
A higher percentage of 7(a) loans went to minority-owned and start-up
businesses compared with conventional loans from 2001 to 2004. More
similar percentages of loans with and without SBA guarantees went to
small businesses owned by women and those located in economically
distressed neighborhoods. The characteristics of 7(a) and market loans
differed in several key respects, however. For example, loans
guaranteed by the 7(a) program were more likely to be larger and have
variable interest rates, longer maturities, and higher interest rates.
SBA‘s recent reestimates of the credit subsidy costs for 7(a) loans
made during fiscal years 1992 through 2004 show that the long-term
costs of these loans have generally been lower than the initial
estimates. Since fiscal year 2005, initial estimates have shown a ’zero
credit subsidy.“ But the ultimate credit subsidy cost for any cohort of
loans made will not be known until no loans are left outstanding.
Reestimated costs may change because of uncertainties in forecasting
and factors such as the number of loan defaults. Since 2002, the agency
has employed an econometric model that incorporates historical data and
other economic assumptions for its credit subsidy cost estimates and
reestimates instead of relying primarily on predictions based on
historical average loan performance.
What GAO Recommends:
GAO recommends that SBA take steps to ensure that the 7(a) program‘s
performance measures provide information on program outcomes.
In written comments, SBA agreed with the recommendation in this report
but disagreed with one comparison in a section of the report on credit
scores of small businesses with 7(a) and conventional loans.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-769].
To view the full product, including the scope and methodology, click on
the link above.For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov.
[end of section]
Contents:
Letter:
Results in Brief:
Background:
Though Incorporating Policy Objectives from the 7(a) Program's
Legislative History, 7(a)'s Performance Measures Do Not Gauge the
Program's Impact on Participating Firms:
Limited Evidence Suggests That Certain Market Imperfections May
Restrict Access to Credit for Some Small Businesses:
A Higher Percentage of 7(a) Loans Went to Certain Segments of the Small
Business Lending Market, but Conventional Loans Were Widely Available:
Current Reestimates Show Lower-than-Expected Subsidy Costs, but Final
Costs May be Higher or Lower for Several Reasons:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope and Methodology:
Analysis of Statutory Framework of 7(a) Program and Its Performance
Measures:
Economic Literature on Credit Rationing and Discrimination:
Comparison between 7(a) and Conventional Loans:
Description of Credit Subsidy Cost Estimates and Reestimates:
Analysis of 504 Loan Program:
Appendix II: Summary of Economic Literature on the Empirical Evidence
for Credit Rationing and Discrimination in the Conventional Lending
Market:
Appendix III: Descriptive Statistics of 504 Loan Program:
Appendix IV: Comments from the Small Business Administration:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Attributes of Successful Performance Measures:
Table 2: 7(a) Performance Measure Targets and Results, 2004-2006:
Figures:
Figure 1: Loan Volume for 7(a) and Conventional Small Business Loans,
2005:
Figure 2: Percentage of 7(a) and Conventional Loans by Minority Status
of Ownership, 2001-2004:
Figure 3: Percentage of 7(a) and Conventional Loans by Status as a New
Business, 2001-2004:
Figure 4: Percentage of 7(a) and Conventional Loans by Gender of
Ownership, 2001-2004:
Figure 5: Percentage of 7(a) and Conventional Loans by Census
Divisions, 2001-2004:
Figure 6: Percentage of Small Business Credit Scores (2003-2006) for
Firms That Received 7(a) and Conventional Credit in D&B/FIC Sample
(1996-2000), by Credit Score Range:
Figure 7: Percentage of 7(a) Loans and Conventional Loans by Loan Size,
2001-2004:
Figure 8: Percentage of 7(a) and Conventional Loans by Loan Maturity
Category, 2001-2004:
Figure 9: Interest Rates Comparison for Loans under $1 Million and
Prime Rate, 2001-2004:
Figure 10: Original and Current Reestimated Credit Subsidy Rates for
Loans Made from 1992 through 2006:
Figure 11: Percentage of 504 Loans by Minority Status of Ownership,
2001-2004:
Figure 12: Percentage of 504 Loans by Status as a New Business, 2001-
2004:
Figure 13: Percentage of 504 Loans by Gender of Ownership, 2001-2004:
Figure 14: Percentage of Small Business Credit Scores for Firms That
Received 504 Loans by Credit Score Range, 2003-2006:
Figure 15: Percentage of 504 Loans by Loan Size, 2001-2004:
Figure 16: Percentage of 504 Loans in Distressed Neighborhoods, 2001-
2004:
Figure 17: Percentage of 504 Loans by Number of Employees in the Firm,
2001-2004:
Figure 18: Percentage of 504 Loans by Census Divisions, 2001-2004:
Figure 19: Percentage of 504 Loans by Business Organization Type, 2001-
2004:
Abbreviations:
D&B: Dun & Bradstreet Corporation:
EZ/EC: Empowerment Zone and Enterprise Community:
FCRA: Federal Credit Reform Act of 1990:
FDIC: Federal Deposit Insurance Corporation:
FIC: Fair Isaac Corporation:
FSS: Financial Stress Score:
GPRA: Government Performance and Results Act of 1993:
PAR: Performance and Accountability Report:
RC: Renewal Community:
SBA: Small Business Administration:
SBPS: Small Business Predictive Score:
SSBF: Survey of Small Business Finances:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 13, 2007:
The Honorable Tom Coburn, M.D.
Ranking Member:
Subcommittee on Federal Financial Management, Government Information,
Federal Services, and International Security:
Committee on Homeland Security and Governmental Affairs:
United States Senate:
Dear Dr. Coburn,
Small businesses represent more than 99 percent of American firms and
employ half of all private sector employees. The Small Business
Administration (SBA) was created in 1953 to assist and protect the
interests of small businesses in order to preserve free competition, in
part by addressing constraints in the supply of credit for these firms.
SBA's 7(a) Loan Program--the agency's largest loan program for small
businesses--is intended to help small businesses obtain credit that
they would be unable to obtain in the conventional lending market. For
example, small businesses may be unable to obtain credit from
conventional lenders because these firms may lack the financial and
other information that larger, more established firms can provide. By
providing a loan guarantee that covers a portion of a lender's losses
if a small business is no longer able to meet its loan obligations, the
7(a) program decreases the risk to the lender and may make more credit
available to small businesses. In fiscal year 2006, the 7(a) program
assisted slightly more than 80,000 businesses by guaranteeing loans
valued at nearly $14 billion.
Loan guarantee programs can result in subsidy costs to the federal
government, and the Federal Credit Reform Act of 1990 (FCRA) requires,
among other things, that agencies estimate the cost of these programs-
-that is, the cost of the loan guarantee to the federal government.
FCRA also recognizes the difficulty of estimating credit subsidy costs
and acknowledges that the eventual cost of the program may deviate from
initial estimates. SBA makes its best initial estimate of the 7(a)
program's credit subsidy costs and revises (reestimates) the estimate
annually as new information becomes available. In fiscal years 2005 and
2006, SBA estimated that the credit subsidy cost of the 7(a) program
would be equal to zero--that is, the program would not require annual
appropriations of budget authority for new loan guarantees. To offset
some of the costs of the program, such as default costs, SBA assesses
lenders two fees on each 7(a) loan. The guarantee fee must be paid by
the lender at the time of loan application or within 90 days of the
loan being approved, and is based on the guaranteed portion of the loan
amount approved and can be passed on to the borrower.[Footnote 1] The
ongoing servicing fee must be paid annually by the lender and is based
on the outstanding balance of the guaranteed portion of the
loan.[Footnote 2] In making its 2005 and later estimates, SBA adjusted
the ongoing servicing fee so that the initial credit subsidy estimates
would be zero based on expected loan performance.[Footnote 3] Although
the 7(a) loan guarantee program is intended to be a "zero credit
subsidy" program, FCRA provides that higher reestimates of subsidy
costs, when they occur, are funded separately.[Footnote 4] According to
FCRA, permanent indefinite budget authority is available to cover any
higher reestimates of subsidy costs for the 7(a) loan program.[Footnote
5] Thus, any reestimates exceeding the initial estimates would
represent a cost to the federal government.
We have noted elsewhere the challenges that Congress faces in
reexamining the appropriate role and size of many federal programs that
entail costs to the federal government.[Footnote 6] At your April 2006
hearing on the effectiveness of SBA, you asked what types of businesses
were assisted by SBA and whether the agency's activities have
measurable results for small businesses.[Footnote 7] In light of the
challenges facing Congress, as well as your concerns about the goals
and impact of SBA's 7(a) loan program, you asked us to look into
several aspects of the 7(a) loan program. Specifically, this report
discusses (1) the 7(a) program's purpose, based on its underlying
statutes and legislative history, and the performance measures SBA uses
to assess the program's results; (2) evidence of market constraints, if
any, that may affect small businesses' access to credit in the
conventional lending market; (3) the segments of the small business
lending market that are served by 7(a) loans and the segments that are
served by conventional loans; and (4) differences in SBA's estimates
and reestimates of the 7(a) program's credit subsidy costs and the
factors that may cause uncertainty about the costs of the 7(a) program
to the federal government. As agreed with your office, we have also
included in appendix III information on the characteristics of loans
financed under SBA's 504 program, which provides long-term, fixed-rate
financing for major fixed assets, such as land and buildings.[Footnote
8]
To describe the purpose of the 7(a) program, we reviewed the program's
underlying statutes and legislative history to understand how the
program was intended to help small businesses. To assess SBA's
performance measures for the 7(a) program, we examined performance and
accountability reports and other related documents that describe the
measures SBA uses to assess the performance of the 7(a) program and
compared those performance measures to established GAO criteria for
successful performance measures. We also interviewed SBA officials on
the agency's efforts to improve its performance measures. To identify
any evidence of constraints that could affect small businesses' access
to credit, we summarized peer-reviewed studies on market imperfections
in the lending market. To determine which segments of the small
business lending market the 7(a) and conventional loans serve, we
compared characteristics and loan terms of 7(a) borrowers to those of
small business borrowers. We primarily relied on SBA data from 2001
through 2004 and on the Federal Reserve's 2003 Survey of Small Business
Finances (SSBF).[Footnote 9] In describing 7(a)'s credit subsidy costs,
we compared SBA's original credit subsidy cost estimates for fiscal
years 1992 through 2006 to SBA's most recent reestimates (as reported
in the fiscal year 2008 Federal Credit Supplement) and interviewed SBA
officials about the differences.[Footnote 10] We also reviewed SBA
documents related to the 7(a) credit subsidy cost model. We conducted
our work in Washington, D.C., and Chicago from May 2006 through July
2007 in accordance with generally accepted government auditing
standards. Appendix I discusses our scope and methodology in further
detail.
Results in Brief:
The 7(a) program's design and performance measures in part reflect the
program's legislative history, but the performance measures provide
limited information about the impact of the loans on the small
businesses receiving them. The underlying statutes and legislative
history of the 7(a) program help establish the federal government's
role in assisting and protecting the interests of small businesses,
especially those with minority ownership. The program's performance
measures focus on loan guarantees that are provided to small business
owners identified in the program's authorizing statutes and legislative
history. These firms include start-ups, existing small businesses, and
businesses whose owners face "special competitive opportunity gaps,"
such as minority-or female-owned businesses. However, all of the 7(a)
program's performance indicators are primarily output measures--for
instance, they report on the number of loans approved and funded. As a
result, no information is available on how well firms do after
receiving a 7(a) loan (outcomes). The current measures do not indicate
how well the agency is meeting its strategic goal of helping small
businesses within these groups succeed. The agency is currently
undertaking efforts to develop additional outcome-based performance
measures for the 7(a) program, but agency officials said that it was
not clear when any outcome-based measures might be introduced or what
they might measure.
Limited evidence from economic studies suggests that some small
businesses may face constraints in accessing credit because of
imperfections, such as credit rationing, in the conventional lending
market. Some studies showed, for example, that lenders might lack the
information needed to distinguish between creditworthy and
noncreditworthy borrowers and thus could "ration" credit by not
providing loans to all creditworthy borrowers. Several studies we
reviewed generally concluded that credit rationing was more likely to
affect small businesses because lenders could face challenges in
obtaining enough information on these businesses to assess their risk.
The literature we reviewed on credit rationing relied on data from the
early 1970s through the early 1990s, however, and did not account for
recent trends in the small business lending market. Among these trends
is the increased use of credit scoring, which provides lenders with
additional information on borrowers and may have had a significant
impact on the extent of credit rationing in the current conventional
lending market. In addition to credit rationing, some lenders may deny
credit to firms owned by specific segments of society. Though studies
we reviewed noted some disparities among races and genders in the
conventional lending market, the studies did not offer conclusive
evidence on the reasons for those differences.
7(a) loans went to certain segments of the small business lending
market in higher proportions than conventional loans. For example, 28
percent of 7(a) loans compared with an estimated 9 percent of
conventional loans went to minority-owned small businesses from 2001
through 2004. In addition, 25 percent of 7(a) loans went to small
business start-ups, while the overall lending market served almost
exclusively established firms (about 95 percent). A more similar
percentage of 7(a) and conventional loans went to other segments of the
small business lending market, such as businesses owned by women or
located in distressed neighborhoods. Finally, the characteristics of
7(a) and conventional loans differed in several ways. For example, 7(a)
loans typically were larger and more likely to have variable rates,
longer maturities, and higher interest rates than conventional loans to
small businesses.
SBA's most recent reestimates of the credit subsidy costs for 7(a)
loans made during fiscal years 1992 through 2004 indicate that, in
general, the long-term costs of these loans would be lower than
initially estimated. The 7(a) program has been estimated to be a "zero
credit subsidy" program since fiscal year 2005. The most recent
reestimates, including those made since 2005, may change because of the
inherent uncertainties of forecasting subsidy costs and the influence
of economic conditions, such as interest rates on several factors,
including loan defaults (which exert the most influence over projected
costs) and prepayment rates. Unemployment is another factor related to
the condition of the national economy that could affect the credit
subsidy cost--for instance, if unemployment rises above projected
levels, loan defaults are likely to increase. Beginning in 2003, the
agency has moved from primarily using historical averages of loan
performance data to an econometric model that incorporates historical
data and other economic assumptions to project credit subsidy costs.
This report makes a recommendation to the SBA Administrator to complete
and expand SBA's current work on evaluating the program's performance
measures. In addition, we recommend that SBA use the loan performance
information it already collects, including but not limited to defaults,
prepayment rates, and the number of loans in good standing, to better
report how small businesses fare after they participate in the 7(a)
program.
We provided a draft of this report to SBA for review and comment. In
written comments, SBA agreed with our recommendation (see app. IV).
However, SBA disagreed with a comparison in the section of our report
discussing credit scores of borrowers with 7(a) and conventional loans.
Specifically, we reported limited differences in the credit scores of
small businesses with 7(a) and conventional loans. Although stating in
its letter that "the numbers have not been worked out," SBA concluded
that the impact on loan defaults from the higher share of 7(a) loans in
the riskier credit score categories would not be insignificant. Our
analyses of credit scores and other borrower and loan characteristics
was not intended to quantify the impact of differences in these
characteristics on 7(a) defaults. We continue to believe that our
analysis of credit scores provides a reasonable basis for comparing the
scores of business in different credit score categories. Further
analyses of these types are consistent with our recommendation that SBA
expand its abilities to assess the overall effectiveness of the 7(a)
program. In addition, SBA provided technical comments, which we
incorporated into the report as appropriate.
Background:
Initially established in 1953, the 7(a) program guarantees loans made
by commercial lenders--mostly banks--to small businesses for working
capital and other general business purposes.[Footnote 11] The guarantee
assures the lender that if a borrower defaults on a loan, the lender
will receive an agreed-upon portion (generally between 50 percent and
85 percent) of the outstanding balance. Because the guarantee covers a
portion of the outstanding amount, both the lender and SBA share some
of the risk associated with a potential default. SBA is not liable for
the guarantee should the lender not comply materially with the
program's regulations--for instance, by not paying the guarantee fee to
SBA in a timely manner. As figure 1 shows, SBA's share of loans
guaranteed by the 7(a) program was an estimated 4.1 percent of all
outstanding small business loan dollars for loans under $1 million
($24.7 billion out of $600.8 billion). This share accounts for about
1.3 percent of the number of outstanding small business loans of under
$1 million in 2005 (about 264,000 out of 21 million loans).[Footnote
12] SBA's shares of outstanding small business loans under $1 million
for the years 2003 and 2004 were similar.[Footnote 13]
Figure 1: Loan Volume for 7(a) and Conventional Small Business Loans,
2005:
[See PDF for image]
Source: GAO analysis of SBA outstanding 7(a) loan data and Office of
Advocacy special tabulations of call reports (Consolidated Reports of
Condition and Income for U.S. Banks).
[End of figure]
SBA relies on lenders to process and service 7(a) loans and to ensure
that borrowers meet the program's eligibility requirements.[Footnote
14] To be eligible for the 7(a) loan program, a business must be an
operating for-profit small firm (according to SBA's size standards)
located in the United States. To determine whether a business qualifies
as small for the purposes of the 7(a) program, SBA uses size standards
that it has established by industry.[Footnote 15] These standards set
the maximum average number of employees or annual receipts that a small
business may have. While SBA gives special consideration to certain
groups of business owners, the program does not set aside loans for or
require that a certain number of loans be made to targeted groups.
Nevertheless, SBA has performance measures that track how many loans go
to new small businesses and that include information on various types
of businesses, such as minority-, women-, and veteran-owned firms.
In addition to making sure that borrowers meet the size requirements,
lenders must certify that small businesses meet the "credit elsewhere"
requirement. SBA does not extend credit to businesses if the financial
strength of the individual owners or the firm itself is sufficient to
provide or obtain all or part of the financing or if the business can
access conventional credit. To certify borrowers as having met the
credit elsewhere requirement, lenders must first determine that the
firm's owners are unable to provide the desired funds from their
personal resources. Second, the credit elsewhere test requires that
lenders determine that the desired credit, for similar purposes and
period of time, is unavailable to the firm on reasonable terms and
conditions from nonfederal sources without SBA assistance, taking into
consideration prevailing rates and terms in the community or locale
where the firm conducts business. Nonfederal sources may include any
lending institutions or a borrower's personal resources.
According to SBA's fiscal year 2003-2008 Strategic Plan, the agency's
mission is to maintain and strengthen the nation's economy by enabling
the establishment and viability of small businesses and by assisting in
the economic recovery of communities after disasters. SBA describes the
7(a) program as contributing to an agencywide goal to "increase small
business success by bridging competitive opportunity gaps facing
entrepreneurs." As reported annually in SBA's Performance and
Accountability Reports (PAR), the 7(a) program contributes to this
strategic goal by fulfilling each of the following three long-term,
agencywide objectives: (1) increasing the positive impact of SBA
assistance on the number and success of small business start-ups, (2)
maximizing the sustainability and growth of existing small businesses
that receive SBA assistance, and (3) significantly increasing
successful small business ownership within segments of society facing
special competitive opportunity gaps. Groups facing these special
competitive opportunity gaps include those that SBA considers to own
and control little productive capital and to have limited opportunities
for small business ownership (such as African Americans, American
Indians, Alaska Natives, Hispanics, Asians, and women) and those that
are in certain rural or low-income areas. The 7(a) program has nine
performance measures. For each of its three long-term objectives, SBA
collects and reports on (1) the number of loans approved, (2) the
number of loans funded (i.e., money that was disbursed), and (3) the
number of firms assisted.
To report on its performance measures, SBA collects data from lenders.
Loan-level data for the 7(a) program are housed in the Loan Accounting
System. This system contains data describing the loan, such as the
percentage of the loan guaranteed by SBA, the number of months to
maturity, and the interest rate (fixed or variable). The data also
include information on the small firm, such as the ethnicity and gender
of the principal owner, the number of employees, and the firm's status
as "new" (i.e., less than 2 years old). Furthermore, the system
contains data on the loan's status--for example, whether the loan has
been purchased by SBA (i.e., is in default), has been prepaid, or is in
good standing.
According to provisions in FCRA, at the time a guaranteed loan is made,
the credit subsidy cost is financed with the program's annual
appropriations. Also under FCRA, SBA makes annual revisions
(reestimates) of credit subsidy costs for each cohort of loans made
during a given fiscal year using new information about loan
performance, revised expectations for future economic conditions and
loan performance, and improvements in cash flow projection methods.
These reestimates represent additional costs or savings to the
government and are recorded in the budget. FCRA provides permanent
indefinite budget authority for any reestimated increases of credit
subsidy costs (upward reestimates) that occur after the year in which a
loan is disbursed. Reestimated reductions of subsidy costs (downward
reestimates) are credited to the Treasury and are unavailable to the
agency. In addition, FCRA does not count administrative expenses
against the appropriation for credit subsidy costs. Instead,
administrative expenses are subject to separate appropriations and are
recorded each year as they are paid, rather than as loans are
originated.
Though Incorporating Policy Objectives from the 7(a) Program's
Legislative History, 7(a)'s Performance Measures Do Not Gauge the
Program's Impact on Participating Firms:
The performance measures for the 7(a) program incorporate the various
policy objectives described in the program's underlying statutes and
legislative history but do not assess the impact of the loan guarantees
on small businesses receiving loans. We compared criteria for the
characteristics of effective performance measures and found that the
7(a) performance measures incorporated several of these attributes. For
example, the performance measures track the main activity of the 7(a)
program by identifying the number of loans that are approved for small
firms that have been unable to obtain credit in the conventional
lending market. However, the performance measures do not show whether
the program is meeting the agency's goal of improving the success of
small firms that participate in the program. None of the 7(a)
performance measures provide information on how well firms do after
they have received a loan. SBA has been undertaking efforts to develop
additional performance measures to describe the program's impact on
participating firms. But the agency has yet to define specific outcome-
based performance measures and does not have a time line for
implementing such measures.
The 7(a) Program's Legislative History Emphasizes the Program's Role in
Meeting Credit Needs of Certain Small Businesses:
The 7(a) program's underlying statutes and legislative history have
helped establish the federal government's role in assisting and
protecting the interests of small business, taking into account the
importance of these businesses to the overall functioning of the
national economy. The legislative basis for the 7(a) program recognizes
that the conventional lending market is the principal source of
financing for small businesses and that the loan assistance that SBA
provides is intended to supplement rather than compete with that
market. However, as the legislative history suggests, conventional
lending may not be a feasible financing option for some small
businesses under certain circumstances. For example, conventional
lenders may be unwilling to make loans when the risk of a small
business is difficult to assess--for instance, when they believe that
the small business has insufficient assets or specialized inventory and
equipment or lacks a credit history, as in the case of a start-up. In
addition, the loan terms offered to a small business in the
conventional lending market may not be practical--for example, a small
business may need loans with longer-term maturities than conventional
lenders may be willing to provide.
The design of the 7(a) program is consistent with the program's
underlying statutes and legislative history in that SBA collaborates
with the conventional market in identifying and supplying credit to
small businesses in need of assistance. Specifically, the 7(a) program
has three design features that help it address concerns identified in
its legislative history. First, the loan guarantee, which plays the
same role as collateral, limits the lender's risk in extending credit
to a small firm that may not have met the lender's own requirements for
a conventional loan. According to SBA officials, a lender's willingness
to underwrite the loan only with the guarantee confirms that the 7(a)
program fills a credit gap. Second, the "credit elsewhere" requirement
is intended to provide some assurance that guaranteed loans are offered
only to firms that are unable to access credit on reasonable terms and
conditions in the conventional lending market. Lenders follow SBA
policies and procedures in determining whether a small business
fulfills this key 7(a) program requirement. SBA officials explained
that the agency is currently reviewing how lenders apply the credit
elsewhere requirement, though the results of this review are not yet
complete. Third, an active secondary market for the guaranteed portion
of a 7(a) loan allows lenders to sell the guaranteed portion of the
loan to investors, providing additional liquidity that lenders can use
for additional loans.
Numerous amendments to the Small Business Act and to the 7(a) program
have laid the groundwork for broadening small business ownership among
certain groups, including veterans, handicapped individuals, women,
African Americans, Hispanics, Native Americans, and Asians. The 7(a)
program also includes provisions for extending financial assistance to
small businesses that are located in urban or rural areas with high
proportions of unemployed or low-income individuals or that are owned
by low-income individuals. The program's legislative history highlights
its role in helping small businesses, among other things, get started,
allowing existing firms to expand, and enabling small businesses to
develop foreign markets for their products and services.
The 7(a) Program's Performance Measures Are Related to the Program's
Core Activity, but Do Not Provide Information on Its Impact on
Participating Firms:
We stated in earlier work that a clear relationship should exist
between an agency's long-term strategic goals and its program's
performance measures.[Footnote 16] Outcome-based goals or measures
showing a program's impact on those it serves should be included in an
agency's performance plan whenever possible. Most plans typically
supplement outcome goals with output goals showing the number and type
of services provided because the program may not meet an outcome goal
in the year covered by the plan. In some cases, a goal may be too
difficult to measure. In previous work, we have also identified
specific attributes of successful performance measures.[Footnote 17]
For example, each performance measure should have a measurable target
and explicit methodology showing how that target was determined.
Without a measurable target, an organization may be unable to determine
whether it is meeting its goals. Table 1 provides a detailed
description of these key attributes and discusses the potentially
adverse consequences of not incorporating them into performance
measures.
Table 1: Attributes of Successful Performance Measures:
Attribute: Core program activity;
Definitions: Measure covers the activities that an entity is expected
to perform in support of the program's intent;
Potentially adverse consequences of not meeting attribute: Managers and
stakeholders may not have enough information in core program areas.
Attribute: Measurable target;
Definitions: Measure has a numerical goal;
Potentially adverse consequences of not meeting attribute: It may be
impossible to determine whether a program's performance is meeting
expectations.
Attribute: Reliability;
Definitions: Measure produces the same result under similar conditions;
Potentially adverse consequences of not meeting attribute: Reported
performance data are inconsistent and uncertainty exists about them.
Attribute: Clarity;
Definitions: Measure is clearly stated and the name and definition are
consistent with the methodology used to calculate it;
Potentially adverse consequences of not meeting attribute: Data could
be misleading to users and not capture what is intended to be measured.
Attribute: Objectivity;
Definitions: Measure is reasonably free from significant bias or
manipulation;
Potentially adverse consequences of not meeting attribute: Performance
assessments may be systematically over-or understated.
Attribute: Linkage;
Definitions: Measure is aligned with division and agencywide goals and
mission;
Potentially adverse consequences of not meeting attribute: Behaviors
and incentives created by measures do not support achieving division or
agencywide goals or mission.
Source: GAO-03-143.
[End of table]
We reviewed SBA's performance measures for the 7(a) loan program and
found that the measures generally exhibited all of the traits described
above, except for the measurable target and linkage attribute.
According to SBA's fiscal year 2006 PAR, the nine performance measures
were:
1. number of new loans approved to start-up small businesses,
2. number of new loans funded to start-up small businesses,
3. number of start-up small businesses assisted,
4. number of new loans approved to existing small businesses,
5. number of new loans funded to existing small businesses,
6. number of existing small businesses assisted,
7. number of new loans approved to small businesses facing special
competitive opportunity gaps,
8. number of new loans funded to small businesses facing special
competitive opportunity gaps, and:
9. number of small businesses facing special competitive opportunity
gaps assisted.
All nine performance measures we reviewed provided information that
related to the 7(a) loan program's core activity, which is to provide
loan guarantees to small businesses. In particular, the indicators all
provided the number of loans approved, loans funded, and firms assisted
by subgroups of small businesses the 7(a) program is intended to
assist. As stated earlier, the program's legislative history indicates
that SBA's specific lending objectives include stimulating small
business in distressed areas, promoting small businesses' contribution
to economic growth, and promoting minority enterprise opportunity.
Consequently, SBA has developed performance measures that specifically
track how many guaranteed loans go to those small business owners that
the agency refers to collectively as facing special competitive
opportunity gaps. Similarly, SBA separately tracks loan data regarding
start-up small businesses, another group that the 7(a) program's
legislative history specifically cites as having challenges in
obtaining credit within the conventional lending market.
As table 2 shows, in 2004 and 2005 SBA generally met or exceeded its
goals for the number of loans approved for start-ups, existing small
businesses, and businesses facing special competitive opportunity gaps.
In 2006, SBA did not meet any of its targets for these measures.
However, while the 7(a) program did not meet its targets, it approved
slightly more than 90 percent of the loans that it had set as its goal.
SBA also did not always meet its target for the number of firms
assisted. In years when SBA did not meet these targets, the 7(a)
program again met almost 90 percent of its goal for firms assisted.
Though it is not clear why SBA did not meet these targets, SBA's fiscal
year 2006 PAR suggests that there may have been less demand for 7(a)
loans. In addition, SBA officials explained that the agency did not
make loans to small businesses directly and therefore had less control
over the number of loans made. Instead, the agency relies primarily on
marketing and community outreach to inform both lenders and prospective
borrowers about the 7(a) program. Furthermore, SBA officials explained
that the 7(a) program staff leverages other SBA offices, such as those
that offer technical assistance to small businesses, to further raise
the awareness among the general public and potential lenders about the
7(a) program.
Table 2: 7(a) Performance Measure Targets and Results, 2004-2006:
Performance measures: Number of loans approved: Start-up small
business;
Fiscal year: 2004: Target: 18,000;
Fiscal year: 2004: Result: 18,134;
Fiscal year: 2005: Target: 22,671;
Fiscal year: 2005: Result: 29,587;
Fiscal year: 2006: Target: 33,024;
Fiscal year: 2006: Result: 32,983.
Performance measures: Number of loans approved: Existing small
business;
Fiscal year: 2004: Target: 72,000;
Fiscal year: 2004: Result: 62,999;
Fiscal year: 2005: Target: 65,305;
Fiscal year: 2005: Result: 66,313;
Fiscal year: 2006: Target: 73,536;
Fiscal year: 2006: Result: 64,307.
Performance measures: Number of loans approved: Small business facing
special competitive opportunity gap;
Fiscal year: 2004: Target: 44,617;
Fiscal year: 2004: Result: 60,787;
Fiscal year: 2005: Target: 68,621;
Fiscal year: 2005: Result: 74,307;
Fiscal year: 2006: Target: 76,690;
Fiscal year: 2006: Result: 71,326.
Performance measures: Number of firms assisted: Start-up small
business;
Fiscal year: 2004: Target: 18,000;
Fiscal year: 2004: Result: 15,351;
Fiscal year: 2005: Target: 22,671;
Fiscal year: 2005: Result: 25,086;
Fiscal year: 2006: Target: 28,224;
Fiscal year: 2006: Result: 27,368.
Performance measures: Number of firms assisted: Existing small
business;
Fiscal year: 2004: Target: 72,000;
Fiscal year: 2004: Result: 53,544;
Fiscal year: 2005: Target: 65,305;
Fiscal year: 2005: Result: 57,296;
Fiscal year: 2006: Target: 62,144;
Fiscal year: 2006: Result: 52,935.
Performance measures: Number of firms assisted: Small business facing
special competitive opportunity gap;
Fiscal year: 2004: Target: 44,617;
Fiscal year: 2004: Result: 52,075;
Fiscal year: 2005: Target: 68,621;
Fiscal year: 2005: Result: 64,390;
Fiscal year: 2006: Target: 64,377;
Fiscal year: 2006: Result: 60,691.
Source: GAO analysis of SBA's fiscal years 2006 and 2007 Budget Request
and Performance Plan and fiscal year 2006 PAR.
[End of table]
By having quantifiable goals, all of the performance measures partly
met our criterion for having a measurable target attribute. SBA
annually reports performance measure data, publishing goals in the
agency's annual Budget Request and Performance Plan for the upcoming
fiscal year and results for the preceding fiscal year in its PAR.
Though having measurable targets is a positive attribute, the PAR does
not contain information about how SBA set its goals. According to SBA
officials, the actual targets set for all of the measures related to
the 7(a) program are based on historical data. SBA officials explained
that the number of loans approved is calculated by dividing the amount
appropriated for loan guarantees in a given fiscal year by the previous
fiscal year's average loan amount, producing a target for the number of
loans approved. SBA also measures the number of loans funded and firms
assisted, both of which closely track the number of loans approved.
According to SBA officials, both of these measures are always slightly
lower than the number of loans approved because not all approved loans
are funded and the number of firms assisted does not include multiple
loans to the same firm in a given fiscal year.
In addition, the 7(a) program's performance measures are generally
reliable, clearly defined, and objective. Our assessment of SBA's
databases that contain information on the agency's performance measures
concluded that these data were sufficiently reliable for the purposes
of evaluating key loan characteristics. Additionally, most of the
measures are clearly described in the SBA documents that addressed the
7(a) program's performance measures, since each performance measure's
name is also its definition. Finally, the performance measures are
objective and generally free from any biases, in part because they
simply report the overall annual volume (i.e., outputs) of guaranteed
lending business.
Since all of the 7(a) program's performance measures are primarily
output measures--that is, they report on the number of loans approved
and funded and firms assisted--SBA does not collect any information
that discusses how well firms are doing after receiving a 7(a) loan
(outcomes). Further, none of the measures link directly to SBA's long-
term objectives. As a result, the performance measures do not fully
support SBA's strategic goal to "increase small business success by
bridging competitive opportunity gaps facing entrepreneurs." We noted
in 1999 that SBA relies on output measures, such as an increase in the
number of loans, but does not show how these measures are related to
increasing opportunities for small businesses to be successful--SBA's
main goal.[Footnote 18] SBA's Inspector General also concluded in a
2000 report that most 7(a) performance measures were output based and
did not provide information showing the extent to which the program was
accomplishing its mission under the Small Business Act.[Footnote 19]
SBA management concurred with the Inspector General's conclusion and
recommendations, including that the agency develop performance measures
to gauge outcomes and goals for meeting the requirements set forth in
the Government Performance and Results Act of 1993 (GPRA).
SBA is Working to Gauge the 7(a) Program's Impact on Participating
Firms:
SBA officials have recognized the importance of developing performance
measures that better assess the 7(a) program's impact on the small
firms that receive the guaranteed loans. SBA is expecting a final
report in the summer of 2007 from the Urban Institute, which has been
contracted to undertake several evaluative studies of several programs,
including 7(a), that provide financial assistance to small businesses.
Components of this work include assessing potential duplication of
SBA's main financial assistance programs by state or local programs,
establishing a baseline measure of SBA customer satisfaction, and
interviewing participating lenders about their underwriting practices.
One component of the study that will not be undertaken is an analysis
to determine how outcomes for firms assisted through financial
assistance programs, such as 7(a), would differ in the absence of SBA
assistance. The impact study, as designed by the Urban Institute,
required the use of credit scores for firms that did not receive SBA
assistance.[Footnote 20] Though costs associated with this component of
the study initially prohibited SBA from undertaking it, SBA officials
explained that they were advised that they are legally prohibited from
obtaining credit score data from firms with which they have no
relationship.
SBA officials explained that no formal decision had yet been made about
how the agency might alter or enhance the current set of performance
measures to provide more outcome-based information related to the 7(a)
program, for several reasons. These included the agency's reevaluation
of its current strategic plan in response to GPRA's requirement that
agencies reassess their strategic plans every 3 years, a relatively new
administrator who may make changes to the agency's performance measures
and goals, and the cost and legal constraints associated with the Urban
Institute study.[Footnote 21] However, SBA already collects information
showing how firms are faring after they obtain a guaranteed loan. In
particular, SBA regularly collects information on how well
participating firms are meeting their loan obligations. This
information generally includes, among other things, the number of firms
that have defaulted on or prepaid their loans--data that can serve as
reasonable proxies for determining a firm's financial status. Though
this information provides some indication of how successful firms are
after receiving a 7(a) guaranteed loan, the agency primarily uses the
data only to estimate some of the costs associated with the program and
for internal reporting purposes, such as monitoring participating
lenders and analyzing its current loan portfolio. Expanding uses of
this information as part of its performance measures could provide SBA
and others helpful information for describing the financial status of
firms that have been assisted by the 7(a) program.
Limited Evidence Suggests That Certain Market Imperfections May
Restrict Access to Credit for Some Small Businesses:
Limited evidence from economic studies suggests that some small
businesses may face constraints in accessing credit because of
imperfections, such as credit rationing, in the conventional lending
market. But this evidence is based on data that end with the early
1990s and do not account for developments that have occurred in the
small business lending market since then. We focused on evidence of
credit rationing reported in academic studies published in peer-
reviewed journals.[Footnote 22] With some exceptions, the studies we
reviewed generally concluded that credit rationing was more likely to
exist when there was a lack of information about the borrower--for
example, with small businesses--and that the effect of this type of
credit constraint on the national economy was not likely to be
significant. However, the research on credit rationing was limited by
at least two factors. First, researchers do not all use a similar
definition for credit rationing. Second, as we have noted the studies
we reviewed did not consider recent developments in the small business
lending market, such as the increasing use of credit scores, that may
reduce credit rationing. Finally, though researchers have noted
disparities in lending options among different races and genders,
inconclusive evidence exists as to whether discrimination explains
these differences.
Studies We Reviewed Provide Limited Evidence of Credit Rationing:
We found limited information that credit constraints, such as credit
rationing, could have some effect on small businesses. Credit
rationing, or denying loans to creditworthy individuals and firms,
generally stems from lenders' uncertainty or lack of information
regarding a borrower's ability to repay debt. Economic reasoning
suggests that there exists an interest rate (i.e., the price of the
loan) beyond which banks will not lend, even though there may be
creditworthy borrowers willing to accept a higher interest
rate.[Footnote 23] Because the market interest rate will not climb high
enough to convince lenders to grant credit to these borrowers, these
applicants will be unable to access credit and will also be left out of
the lending market.[Footnote 24] Of the studies we identified that
empirically looked for evidence of credit rationing within the
conventional U.S. lending market, almost all provided some evidence
consistent with credit rationing.[Footnote 25] For example, one study
found evidence of credit rationing across all sizes of firms.[Footnote
26] However, another study suggested that the effect of credit
rationing on small firms was likely small, and another study suggested
that the impact on the national economy was not likely to be
significant.[Footnote 27] Specifically, one of these two studies, which
used data on small businesses, concluded that though crediting
rationing was associated with firm size, it was economically
unimportant to the small businesses within their dataset.[Footnote 28]
Only one study that we reviewed found no evidence of credit rationing,
though it could not rule out the existence of this market
imperfection.[Footnote 29]
In some studies we reviewed, we also found that researchers used
different definitions of credit rationing and that a broader definition
was more likely to yield evidence of the existence of credit rationing
than a narrower definition. For example, one study defined a firm as
being credit rationed if the firm was either denied a loan or
discouraged from applying for credit.[Footnote 30] However, another
study pointed out that firms could be denied credit for reasons other
than credit rationing, such as not being creditworthy.[Footnote 31]
Because the underlying reason for having been denied credit can be
difficult to determine, true credit rationing is difficult to measure.
Other studies of small business lending that we reviewed found evidence
for credit rationing by testing whether the circumstances of denial
were consistent with a "credit rationing" explanation, such as a lack
of information. For example, two studies concluded that having a
preexisting relationship with the lender had a positive effect on the
borrower's chance of obtaining a loan.[Footnote 32] The empirical
evidence from another study suggested that lenders use information
accumulated over the duration of a financial relationship with a
borrower to define loan terms. This study's results suggested that
firms with longer relationships received more favorable terms--for
instance, they were less likely to have to provide collateral. Because
having a relationship with a borrower would lead to the lender's having
more information, the positive effect of a preexisting relationship is
consistent with the theory behind credit rationing.[Footnote 33]
Aside from credit rationing, lenders could potentially deny
creditworthy firms a loan because of the race or gender of the owner.
This practice would also constitute a market imperfection because
lenders would be denying credit for reasons other than interest rate or
another risk associated with the borrower. A 2003 survey of small
businesses conducted by the Federal Reserve examined differences in
credit use among racial groups and between genders. The survey found
that differences did not exist across all comparison groups.[Footnote
34] For example, the survey found that 48 percent of small businesses
owned by African Americans and women and 52 percent of those owned by
Asians had some form of credit, while 61 percent of white-owned or
Hispanic-owned businesses had some form of credit.[Footnote 35]
Studies have attempted to determine whether such disparities are due to
discrimination, but the evidence from the studies we reviewed was
inconclusive. For example, one study found evidence that discrimination
existed against Hispanics and Asians, but not against African Americans
and women.[Footnote 36] A different study that was able to control for
the effects of a variety of variables, such as whether the borrower had
experienced bankruptcy and the borrower's credit score, found some
evidence of discrimination against African Americans and women, but not
against other minorities.[Footnote 37] Finally, a third study found
significant evidence that only firms owned by African Americans faced
obstacles in obtaining credit and were charged higher interest rates,
while the study did not find significant evidence that other minority-
and women-owned firms face discrimination.[Footnote 38]
The Literature Does Not Address Recent Trends in the Small Business
Lending Market:
The studies we reviewed regarding credit rationing used data from the
early 1970s through the early 1990s and thus did not account for
several recent trends that may have impacted the extent of credit
rationing within the small business lending market. According to a
Federal Reserve report on the availability of credit for small
businesses, lenders are increasingly using credit scores in loan
decisions involving small businesses. Credit scores provide additional
information about borrowers and may reduce the cost to lenders of
evaluating the risk potential borrowers present. As a result, credit
scores may decrease the extent to which credit rationing occurs.
Further, our economic literature review identified one study suggesting
that the recent changes in bankruptcy laws may also impact the small
business lending market because loans to small businesses are often
secured by personal credit. Specifically, the change in bankruptcy laws
that occurred in October 2005 may have made it more difficult for some
individuals to declare bankruptcy and thus decreased the risk to
lenders, making lenders more willing to extend credit. In addition,
because it has become harder to declare bankruptcy, potential borrowers
may be less likely to apply for a loan. These trends may also lead to
less credit rationing in the conventional lending market. Finally,
considerable consolidation has taken place in the banking industry and
may have led to a decrease in the number of small banks. Historically,
smaller banks have been more involved with small business lending
because of the relationships between small local banks and local firms.
As noted previously, relationships with lenders can limit credit
rationing. With the potential decline in the number of small banks,
these relationships may diminish, possibly leading to more credit
rationing.
A Higher Percentage of 7(a) Loans Went to Certain Segments of the Small
Business Lending Market, but Conventional Loans Were Widely Available:
7(a) loans went to certain segments of the small business lending
market in higher proportions than conventional loans. From 2001 to
2004, a higher percentage of 7(a) loans went to minority-owned and
start-up businesses compared with conventional loans. However, more
similar percentages of loans with and without SBA guarantees went to
small businesses owned by women and those located in economically
distressed neighborhoods. The characteristics of 7(a) and market loans
differed in several key respects. For example, loans guaranteed by the
7(a) program were more likely to be larger and have variable interest
rates, longer maturities, and higher interest rates.
Higher Proportion of 7(a) Loans Went to Minority-Owned and Start-Up
Small Businesses:
From 2001 to 2004, minority-owned small businesses received a larger
share of 7(a) than conventional loans. More than a quarter of 7(a)
loans went to small businesses with minority ownership, compared with
an estimated 9 percent of conventional loans (fig. 2). However, in
absolute numbers many more conventional loans went to the segments of
the small business lending market we could measure, including minority-
owned small businesses, than loans with 7(a) guarantees. For example,
if we apply the percentage of 7(a) loans going to minority-owned firms
(28 percent) from 2001 through 2004 to the number of outstanding 7(a)
loans under $1 million in 2004 (223,939), an estimated 62,000 of these
outstanding 7(a) loans went to minority-owned small firms. In
comparison, if we apply the percentage of conventional loans going to
minority-owned firms over the same period (9 percent) to the number of
outstanding loans under $1 million in 2004 (17.13 million), we estimate
that there were more than 1.6 million outstanding loans to minority-
owned small businesses in June 2004.
Figure 2: Percentage of 7(a) and Conventional Loans by Minority Status
of Ownership, 2001-2004:
[See PDF for image]
Source: GAO analysis of SBA and Federal Reserve Board of Governors'
data.
Note: The brackets on the conventional loans represent confidence
intervals. Because the data from the SSBF are from a probability survey
based on random selections, this sample is only one of a large number
of samples that might have been drawn. Since each sample could have
provided different estimates, we express our confidence in the
precision of the particular results as a 95 percent confidence
interval. This is the interval that would contain the actual population
value for 95 percent of the samples that could have been drawn. As a
result, we are 95 percent confident that each of the confidence
intervals in this report will include the true values in the study
population. Data on SBA 7(a) loans do not have confidence intervals
because we obtained data on all the loans SBA approved and disbursed
from 2001 to 2004.
[End of figure]
Compared with conventional loans, a higher percentage of 7(a) loans
went to small start-up firms from 2001 through 2004 (fig. 3).[Footnote
39] Specifically, 25 percent of 7(a) loans went to small business start-
ups from 2001 through 2004. In contrast, an estimated 5 percent of
conventional loans went to newer small businesses over the same period.
Figure 3: Percentage of 7(a) and Conventional Loans by Status as a New
Business, 2001-2004:
[See PDF for image]
Source: GAO analysis of SBA and Federal Reserve Board of Governors'
data.
Note: The brackets on the conventional loans represent a 95 percent
confidence interval.
[End of figure]
More Similar Proportions of 7(a) and Conventional Loans Served Other
Segments of the Small Business Lending Market:
Compared with the differences in the shares of 7(a) and conventional
loans going to minority-owned and start-up small businesses, only
limited differences exist between the shares of 7(a) and conventional
loans that went to other types of small businesses from 2001 through
2004. For example, the share of 7(a) loans going to small women-owned
firms was much closer to the estimated share of conventional loans
going to these firms. Specifically, women-owned firms received 22
percent of all 7(a) loans and an estimated 16 percent of conventional
loans (fig. 4). Furthermore, the percentages of loans going to firms
owned equally by men and women were also more similar--17 percent of
7(a) loans and an estimated 14 percent of conventional loans (see fig.
4). However, these percentages are small compared with those for small
firms headed by men, which captured most of the small business lending
market from 2001 to 2004. These small businesses received an estimated
70 percent of conventional loans and 61 percent of 7(a) loans.
Figure 4: Percentage of 7(a) and Conventional Loans by Gender of
Ownership, 2001-2004:
[See PDF for image]
Source: GAO analysis of SBA and Federal Reserve Board of Governors'
data.
Note: The brackets on the conventional loans represent a 95 percent
confidence interval.
[End of figure]
Similarly, compared with the differences in the shares of 7(a) and
conventional loans going to minority-owned and start-up small
businesses, relatively equal shares of 7(a) and conventional loans
reached small businesses in economically distressed neighborhoods
(i.e., zip code areas) from 2001 through 2004--14 percent of 7(a) loans
and an estimated 10 percent of conventional loans.[Footnote 40] In
order to apply a single measure uniformly across the country, we based
our measure on the minimum poverty level eligibility requirement
employed by two federal programs designed to assist distressed
communities.[Footnote 41] Specifically, we defined distressed
neighborhoods as zip code areas where at least 20 percent of the
population had incomes below the national poverty line (see app. I for
more information on our methodology).
SBA does not specifically report whether a firm uses its 7(a) loan in
an economically distressed neighborhood. Nevertheless, SBA does track
loans that go to firms located in areas it considers "underserved" by
the conventional lending market. SBA defines an "underserved" area as
any one of these federally defined areas: Historically Underutilized
Business Zone, Empowerment Zone/Enterprise Community, low-and moderate-
income census tract (median income of census tract is no greater than
80 percent of the associated metropolitan area or nonmetropolitan
median income), or rural as classified by the U.S. Census.[Footnote 42]
Using this measure, SBA's analysis found that 49 percent of 7(a) loans
approved and disbursed in fiscal year 2006 went to geographic areas
that SBA considered "underserved" by the conventional lending market.
Although a higher proportion of 7(a) loans went to smaller firms (that
is, firms with up to 5 employees), we found that the differences in the
shares of 7(a) and conventional loans were more similar for categories
of larger firms that have 5 or more employees. Specifically, 57 percent
of all 7(a) loans went to small businesses with up to 5 employees,
compared with the estimated 42 percent of conventional loans that went
to firms with a similar number of employees. In contrast, firms with 5
to 9 employees received 21 percent of the 7(a) loans and 24 percent of
conventional loans, and firms with 10 to 19 employees received 12
percent of 7(a) loans and 17 percent of conventional loans. Firms with
20 to 499 employees (the maximum number of employees a business can
have and still be considered small by SBA's standards) also received
more similar shares of 7(a) and conventional loans.[Footnote 43]
More similar proportions of 7(a) and conventional loans also went to
small businesses with different types of organizational structures and
in different geographic locations. For instance, between 2001 and 2004
most 7(a) loans (69 percent) and most conventional loans (an estimated
60 percent) went to corporations.[Footnote 44] Additionally, similar
shares of 7(a) loans (28 percent) and conventional loans (approximately
32 percent) went to sole proprietorships. Similar percentages of 7(a)
and conventional loans went to small firms across geographic locations
(based on the nine Census divisions). The central regions of the
country (e.g., Mountain, West North Central, and West South Central)
received the most similar shares of 7(a) and conventional loans (fig.
5).
Figure 5: Percentage of 7(a) and Conventional Loans by Census
Divisions, 2001-2004:
[See PDF for image]
Source: GAO analysis of SBA data; Art Explosion (map).
Note: The brackets on the conventional loans represent a 95 percent
confidence interval.
[End of figure]
Our analysis of information on the credit scores of small businesses
that accessed credit without SBA assistance showed only limited
differences in these credit scores and those of small firms that
received 7(a) loans. As reported in a database developed by two private
business research and information providers, The Dun & Bradstreet
Corporation and Fair Isaac Corporation (D&B/FIC), the credit scores we
compared are typically used to predict the likelihood that a borrower,
in this case a small business, will repay a loan.[Footnote 45] In our
comparison of firms that received 7(a) loans and those that received
conventional credit, we found that for any particular credit score band
(e.g., 160-
