Everyone loves small businesses. But that’s no reason to keep an agency dedicated to extending loans and other privileges to some of them at the expense of everyone else.
Contrary to common belief, it is not the role of government to subsidize private companies. This statement is true whether the company is green, minority-owned, small, or gargantuan. Besides, the fetish for small businesses is annoying. Small businesses employ 45.9 percent of American workers, according to the Small Business Administration (SBA). That sounds impressive until you realize that 99.9 percent of businesses in America are small. That means 0.1 percent of businesses in the country employ more than half of the work force.
The SBA is mostly useless. No doubt various businesses getting subsidized loans through the agency love it. If your enterprise can’t get a loan because your business plan is subpar, an SBA guarantee will help convince a bank to give you cash, since taxpayers will cover much of the unpaid loan. Likewise, if you think market rates are too high and lenders’ terms are too stiff, an SBA loan will lower your borrowing costs.
But that doesn’t mean the SBA is good for the country as a whole. The SBA boasts that its lending fills an essential gap for small businesses that can’t access adequate capital. Leaving aside the silliness of believing there must be a market failure if not all companies that want a loan can get one, SBA lending is a drop in the bucket: Traditionally, the agency’s loans have represented about 1 percent of all small business loans.
Since it’s so small, why should anyone care? Because—like all government perks—SBA lending creates unseen victims. Most industries that benefit from SBA loans are highly competitive. They include retail, wholesale, travel accommodation, and food service. As if the restaurant industry isn’t cutthroat enough, some competitors benefit from lower borrowing costs than are available to others.
In addition, SBA-guaranteed loans cover up to 85 percent of losses in case of a default, lowering the risk to lenders significantly. It gives banks an incentive to shift lending away from unsubsidized to subsidized businesses. The result is marginally higher borrowing costs for unsubsidized companies than they would likely face without SBA lending shenanigans.
Taxpayers are victims, too. They shoulder the burden of SBA defaults, which have traditionally been about one in six loans. During the COVID-19 pandemic, the SBA shoved hundreds of billions of dollars in grants to businesses as a Band-Aid for government lockdowns. As a result, the SBA’s budget ballooned from less than $1 billion in most years before 2020 to $33 billion in 2024. The main culprits for this expansion were the COVID-era Paycheck Protection Program and SBA disaster loans. It has been well-established that most of the PPP funding went to companies barely affected by the lockdowns because they were well-capitalized and their employees were better able to work remotely. There is also a long trail of evidence that the disaster program is a disaster. From Hurricane Katrina to the COVID pandemic and other disasters, the SBA has a history of failing at the No. 1 thing small businesses need after a disaster: quick access to capital. Dealing with the SBA disaster loan program is “horrific,” according to many accounts and congressional testimony, and the system mainly benefits the wealthiest business owners who had a structure in place to administer the paperwork as well as an already strong relationship with a bank. Those owners could have done well without the SBA.
Back in 1984, President Ronald Reagan’s budget director, David Stockman, called the SBA a “billion dollar waste—a rat hole” that benefited few small businesses while distorting credit markets. The SBA unfortunately survived an attempt to abolish it that year, and it went on to become the $33 billion waste it is today.
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