From the SBA's news desk...

Banking Conditions Directly Affect Small Business

WASHINGTON, D.C. - When small banks face adverse conditions smaller businesses suffer greater detrimental performance than their larger counterparts, according to a new study released today. The study also confirms the conventional wisdom that higher interest rates depress lending in general, which leads to lower growth, employment, and payrolls in firms of all sizes.

The study found that increases in SBA guaranteed loans tended to increase output, employment, and payrolls. Moreover, according to Impact of Tight Money and/or Recessions on Small Business, SBA programs “acted as an economic stabilizer.”

“Small businesses have traditionally relied on bank financing from local banks to a greater extent than their larger counterparts,” said Thomas M. Sullivan, Chief Counsel for Advocacy. “So it’s no surprise that when small banks sneeze, small firms catch cold. The SBA can be proud of the fact that its loan-guarantees are a buffer during a recession or tight money situation,” he said.

Interestingly, the authors found that small bank capital had the largest effect on employment. The effect was about three times that of large banks. The result is that small bank capital is “high-powered” in terms of stimulating employment.

Principal investigator Dr. James Wilcox, Dr. Diana Hancock, and Dr. Joe Peek of PM KeyPoint LLC wrote Impact of Tight Money and/or Recessions on Small Business through funding from the Office of Advocacy.

The Office of Advocacy examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats and it funds research into small business issues.