Small Business Lending in Financial Crises: The Role of Government-Guaranteed Loans

Abstract

This paper examines whether the presence of government-guaranteed lenders helps alleviate small business financial constraints during financial crises. The results indicate that during the 2007–09 financial crisis, areas with a greater share of Small Business Administration 7(a) lenders experienced: (1) a 2.2% increase in small business loan volume, (2) a 3.7% increase in small firm employment and 3.5% increase in establishments, and (3) lower loan default rates. Bank–county–year analysis suggests that SBA banks increase their share of lending when they are capital-constrained, and when local median income is lower. Instrumental variable analysis utilizing SBA program characteristics confirms the baseline results. The findings suggest that targeted government support can play a beneficial role in the presence of private credit market frictions, especially when bank capital is limited and small business financial constraints are severe.