Small businesses have historically relied on community financial institutions for their lending needs. For many small businesses, those needs are often met by credit unions and other financial institutions that operate in their own locales. These partnerships have been years, if not decades, in the making and have established a proven track record of success that has only strengthened during the pandemic.
Now, some in Congress and the Biden administration are looking to fundamentally change this relationship and instead push out community financial institutions like credit unions and
Under the proposed direct lending program, the SBA would be able to directly offer loans of $150,000 or less to borrowers, or “through partnerships with third parties.” However, these are not traditional small-business loans that have lender and borrower requirements.
Although well intentioned, a major concern for small businesses and taxpayers is that under the program, the SBA would be given explicit authority to make direct loans to borrowers, instead of working with experienced lenders, as has traditionally been the case so far.
This proposal would inherently sever ties between small businesses and the community financial institutions that they’ve come to depend on. It would direct borrowers to participate in yet another complicated and unfamiliar federal program. Not to mention that even though the SBA-backed Paycheck Protection Program was utilized by many small businesses during the worst months of the pandemic, its success was greatly owed to the efforts of community financial institutions, who stepped up during this time of need to help ensure the mom-and-pop Main Street small businesses that needed smaller loans were able to get them.
While the SBA does have the authority to make direct loans now, the agency has seldom exercised it, with the exception of disaster loans and microloan programs. And when the SBA has exercised its power to distribute direct loans, it has experienced several challenges including high rates of fraud and defaults. Congress should ensure these challenges do not resurface for small-business owners and lead to wasted taxpayer dollars, especially during a critical time of the nation’s economic recovery.
If the SBA is granted the authority to originate and disperse small-business loans, it will discourage lenders from helping small businesses seeking access to credit by providing financial education and other services to small-business owners. Community financial institutions, like credit unions, know their communities and work with the most disadvantaged small businesses who need additional support. The SBA driving lenders out of this space could end up leaving small businesses with the choice between a government loan or no loan.
Also, with PPP forgiveness still underway, and with the future path of the delta variant of the coronavirus unclear, it’s uncertain whether the SBA currently has the infrastructure to successfully run such a program while ensuring sound underwriting and protecting both taxpayers and consumers. The SBA, in partnership with experienced community financial institutions, leverages the lending and underwriting expertise from seasoned lending staff.
Public-private partnerships like the PPP illustrate how effective government relief can be when the SBA and community financial institutions work together. Through the PPP, community financial institutions were able to act quickly, with the SBA’s guidance, to provide much needed emergency funding to keep businesses running.
There is undoubtedly a great need for increased availability of smaller loans to help small businesses, but granting the SBA direct lending authority is not the right solution. Instead, Congress should look for ways to make it easier for community financial institutions to offer more small-dollar loans to small businesses. The Member Business Loan Expansion Act, a bill introduced in the House of Representatives in September, would allow credit unions to offer small-business loans under $100,000. This legislation has the potential to grant more capital access to small businesses as they recover from the pandemic.
An interim solution with no track record of success would only add to the list of hardships small businesses are already facing. Credit unions and other community financial institutions stand ready to work with the SBA and Congress to ensure that small-business lending demands are met.
