Manchin said “no” to build better. How this will impact SBA backed loans


Biden’s Build Back Better bill on social spending and climate could be nearly dead after Democratic Senator Joe Manchin over the weekend shattered any hopes he would vote for the nearly $ 2 trillion package .

Highlighting concerns over the rising level of federal debt, the West Virginia senator shared in a sunday statement that the “American people deserve transparency on the real cost of the Build Back Better Act”. The bill is expected to add an estimated $ 160 billion to the deficit over a ten-year period, according to the findings of the Congress Budget Office.

Without Manchin’s support, the bill, which included billions for climate change mitigation and an improved child tax credit, among other initiatives, would almost certainly fail. Not a single Republican senator has announced his support for the bill, which passed the House in November. Losing a chord is sure to have far-reaching effects. For small businesses, the part that is most likely to sting is the lack of the Small Business Administration’s direct loan program.

A small but powerful provision in the bill would have authorized the SBA’s foray into direct lending, a first for the agency outside of disaster lending. The law was to set aside $ 2 billion for the SBA to provide direct loans of $ 150,000 or less. That number would rise to $ 1 million for small manufacturers.

Supporters of the measure saw the SBA’s engagement in direct lending as a chance to expand access to capital, especially for underserved entrepreneurs and businesses in disadvantaged communities. Many companies were also in favor of this – 85% of small businesses said they support the SBA’s expanding authority to make direct loans, according to a new survey by the Small Business Majority, an advocacy organization. Rights.

But to understand why this initiative was potentially necessary for small businesses, it’s important to take a step back and address the problem that direct lending solves, suggests Michael Roth, a former acting SBA chief who is now an associate. director of Next Street, a small business consultancy firm.

Consider first the successes and failures of the Paycheck Protection Program, the forgivable loan program, which helped millions of small businesses access more than $ 800 billion in loans in the first year and a half of the pandemic. It designates a analysis published in October by researchers at New York University and David Snitkof of the Ocrolus financial services automation platform. It shows clear racial disparities in PPP loans. It is well known at this point that banks, during the early part of the pandemic, tended to favor their own clients over non-clients and this contributed to a racial disparity in obtaining forgivable loans. Black business owners, on the other hand, were more likely to receive their P3s loans from a fintech lender rather than a bank.

Similar trends persist in other SBA lending streams. In funding year 2021, black-owned businesses received only five percent of all 7 (a) loans, according to a November congress note. The same memo shows that Hispanic-owned businesses received only eight percent of all 7 (a) loans.

So, Roth suggests, leaving small business loans entirely to the SBA’s network of private financial institutions can do a disservice to businesses owned by blacks, Latinos, and women.

This is why he favors the direct loan. According to Roth, the direct lending model offered by the SBA acts as a public option if companies cannot access capital through the private market. By offering direct loans, it is expected that small businesses can easily access these loans regardless of their banking relationships or location. The latter can be a particularly advantageous advantage for companies located in banking deserts for example.

Without permission to engage in direct lending, however, it is still possible for the SBA to continue serving underrepresented entrepreneurs. This could, for example, allow fintechs to engage in traditional SBA loans. (The PPP was the first time fintechs were admitted into the SBA lending continuum.)

It could also accommodate more lower dollar banks in its stable of approved lenders. While more than 5,000 lenders have been approved to support PPP loans, around 1,800 institutions were considered active lenders before the pandemic. Brad Thaler, vice president of legislative affairs for the National Association of Federally-Insured Credit Unions (NAFCU), a trade association, explained that loans of $ 150,000 or less are an ideal point for lending to credit unions. And according to the NAFCU research team, 57% of 7 (a) loans made by credit unions were for less than $ 150,000 in the past five years.

Yet credit unions are only a small segment of this lending arena. In funding year 2021, about 100 credit unions made small dollar loans totaling nearly $ 37 million, or about 3% of all SBA 7 (a) loans under $ 150,000. , according to the SBA. Thus, giving them more room at the table could allow more lower dollar lenders to come to the aid of the most under-represented founders.

And isn’t that the point anyway? “If you look at the history, you must ask yourself: who is this program really for? Are we serving small businesses or financial institutions? Roth said.

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