	The Demand and Supply for Business Loans

Most economic and financial analysts view the market for business loans in the U.S. economy in a traditional supply and demand framework that takes into consideration alternative ways to finance a business and various ways for those controlling capital to invest. The economic outlook is more important for long-term borrowing because of its impact on a project's profitability. These concerns are one reason that the Small Business Administration (SBA) created its microloan program. For many purposes, the Small Business Administration defines a small business as one with 500 or fewer employees. On the one hand, small businesses are unable to take advantage of economies of scale in raising capital such as bonds. Those who are concerned about the availability of credit to small businesses frequently suggest a number of reasons that small businesses may pay a higher interest rate or face more requirements to get a loan than an equally creditworthy larger business. This can lead to lenders (and the SBA) requiring owners to pledge personally owned real estate as collateral. SBA loan guarantees might offset this caution during a slowdown and help small businesses to expand. An economic slowdown (recovery) could reduce (increase) the risk-adjusted profitable opportunities for small businesses to invest, reducing (increasing) small businesses' demand for loans. The 2007-2012 decline in house prices is likely to have reduced the collateral value of any real estate owned by a small business and of the business owner's home. In both cases, however, loan volume falls. This risk premium can change as lenders' attitudes toward risk change. Statistics on the SBA's two largest business loan guarantee programs—7(a) and 504/CDC Loan Guaranty programs—can be found in CRS reports. The SBA's Office of Advocacy publishes research based on surveys concerning small business loans, annual reports on small business lending, and occasional reports on other small business issues. Given that the Federal Reserve does not use the SBA's industry based definition of "small," the results are more indicative than an exact measure of what is happening to small business lending as viewed by the SBA. In general, there can be many reasons for declining employment by small businesses. In this case, expanding SBA loan guarantees might help. Conclusion

A number of factors affect the supply and demand for small business loans, independent of the SBA's guarantee. Forecasting the impact of the business cycle on the demand for SBA guarantees on loans to small businesses is particularly difficult for two reasons.
Small businesses (usually defined as companies with 500 or fewer employees) are an important part of the nation's economy. At various times during the business cycle, concern is voiced about the difficulties that small businesses have obtaining loans. There can be many reasons for periodic declines in small business lending over the business cycle: loan standards change, the quality of projects to be financed changes, and small businesses' demand for loans fluctuates with anticipated customer demand.
Congress created the Small Business Administration (SBA) to assist small businesses in many ways, including by guaranteeing loans made by the private sector. This guarantee reduces a lender's potential loss on a small business loan and should make lenders look more favorably on small business loan requests. Nevertheless, there are several reasons why the volume of small business loans varies over time despite the availability of the SBA's guarantee.
The business cycle's impact on the volume of SBA guarantees is not clear. When the economy is growing, demand for SBA loan guarantees can increase as small business expands to take advantage of opportunities or small businesses might reduce their demand because they can obtain loans without the SBA's guarantee. In an expanding ecomomy, lenders are more willing to make loans on more favorable terms.
In slowdowns, concern over potential losses leads lenders to tighten all loan standards, perhaps affecting small businesses disproportionately. The demand for SBA loan guarantees can increase as small businesses are unable to obtain loans without the government's backing or interest in SBA loan guarantees can fall because there are fewer reasons to borrow. Even with an SBA guarantee, small business owners frequently pledge their personal residences as collateral for business loans. During the 2007-2009 recession, the widespread decline in home prices reduced owners' abilities to provide such credit enhancement. The ultimate impact of these factors on SBA loan volume, which work in opposite directions, cannot, however, be predicted with confidence.
This report analyzes reasons used to justify government intervention in small business lending and discusses how making the proper analysis of problems improves the policy outcome. For program information on SBA loan guarantees, see CRS Report R41146, Small Business Administration 7(a) Loan Guaranty Program, by [author name scrubbed] and CRS Report R41184, Small Business Administration 504/CDC Loan Guaranty Program, by [author name scrubbed]. This report also identifies some sources of information about the condition of the small business loan market.
This report will be updated as developments warrant.