Manchin Said ‘No’ to Build Back Better. How That’ll Ripple Through SBA-Backed Lending

Manchin Said 'No' to Build Back Better. How That'll Ripple Through SBA-Backed Lending
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Biden’s bill on social spending and climate may be better off as if it were dead after Democratic Senator Joe Manchin over the weekend crushed any hopes he would vote for a nearly $2 trillion package.

Noting concerns about inflated federal debt levels, the West Virginia senator shared a statement Sunday that “the American people deserve transparency about the true cost of the Building Back Better Act.” The bill is expected to add nearly $160 billion to the deficit over ten years, according to findings from the Congressional Budget Office.

Without Manchin’s support, the bill, which included billions for climate change mitigation and boosting the children’s tax credit among other initiatives, will almost certainly fizzle out. No Republican senator has announced support for the bill passed by the House in November. Losing a deal is sure to have wide-ranging effects. For small businesses, the most dangerous part is the absence of the Small Business Administration’s direct lending program.

There was a small but powerful provision in the bill that would have allowed the SBA to intervene in direct lending, the agency’s first outside of disaster loans. The law was expected to set aside $2 billion for the SBA to provide direct loans of $150,000 or less. That figure wouldn’t reach $1 million for small manufacturers.

Advocates of this measure saw the SBA’s involvement in direct lending as an opportunity to expand access to capital, particularly to entrepreneurs and underserved businesses from underserved communities. Many businesses have been nice, too — 85 percent of small businesses said they support expanding the SBA’s authority to distribute direct loans, according to a new survey from Small Business Majority, an advocacy organization.

But to understand why this initiative is likely to be 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 interim president at SBA who is now a managing partner of Next Street, a small business. Business consulting firm.

First consider the successes and failures of Paycheck Protection, the revocable loan program that has helped millions of small businesses obtain more than $800 billion in loans during the first year and a half of the pandemic. He points to an analysis released in October by New York University researchers and David Snitkoff for financial services automation platform Ocrolus. Shows clear racial disparities in purchasing power parity lending. It is known at this point that banks, during the early part of the pandemic, tended to favor their customers over non-customers, which contributed to the racial disparity in who got the forgivable loans. Instead, black business owners were more likely to receive PPP loans from a fintech lender rather than a bank.

Similar trends remain in other SBAs lending pipelines. During the 2021 funding, black-owned businesses received only five percent of all seven(a) loans, according to a November congressional memo. The same memo shows that Hispanic-owned businesses received only eight percent of all seven A loans.

Therefore, Roth suggests, leaving small business lending entirely to the SBA’s network of privately owned financial institutions may hurt black-owned, Latino-owned, and women-owned businesses.

For this reason direct lending is preferred. As Roth sees it, the SBA’s proposed direct lending model acts as a public option if companies cannot access capital through the private market. By offering direct lending, it is expected that small businesses will be able to easily access these loans regardless of their banking relationships or location. The latter may be a particularly useful feature for companies located in, for example, banking deserts.

However, without permission to engage in direct lending, a small business agency can still continue to serve unrepresented entrepreneurs. It could, for example, allow fintech to participate in traditional small business management lending. (The PPP was the first time that fintech companies were offered admission into the SBA lending chain.)

It can also welcome more smaller banks of dollars into the stability of its approved lender. While more than 5,000 lenders were approved to support PPP loans, about 1,800 were considered active lenders prior to the pandemic. Brad Thaler, vice president of legislative affairs for the National Association of Federally Secured Credit Unions (NAFCU), explained that loans of $150,000 or less are a good point for credit union lending. According to the NAFCU research team, 57 percent of 7(a) loans made by credit unions have netted less than $150,000 over the past five years.

However, credit unions make up only a tiny slice of this lending arena. During the 2021 financing year, nearly 100 credit unions disbursed small dollar loans totaling about $37 million, which is about three percent of all seven SBA loans under $150,000, according to the Small Business Association. So giving them a bigger seat at the table could enable more of the smaller dollar lenders to help more underrepresented founders.

Isn’t that the point anyway? “If you look historically, you have to ask the question: Who does this program really serve? Are we serving small businesses, or are we serving financial institutions?” Ruth says.

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