The U.S. Small Business Administration guarantees the value of loans made by banks to small businesses that fall just shy of qualifying for conventional loans. These guarantees allow banks to absorb more risk and thus to make loans to a much larger number of small businesses than they would otherwise be able to. While SBA-backed loans constitute only about 8 percent of overall small business lending, they account for 40 percent of long-term loans and thereby provide a critically important source of patient capital for growing small businesses.

The SBA’s flagship 7(a) lending program backs loans of up to $2 million that small businesses can use for working capital, equipment or expansion. The payback period is 7 to 25 years, a longer term than most standard bank loans. In normal times, the SBA guarantees up to 75 percent of the value of these loans. Under the American Recovery and Reinvestment Act adopted in February 2009, the SBA-guaranteed portion was temporarily increased to 90 percent in order to expand the availability of credit for small businesses during the financial crisis.

The SBA’s other major loan program is the 504 program, which helps small businesses buy the buildings they occupy or plan to occupy, thus stabilizing their costs and ensuring that they are not priced out of areas where property values and rents are rising rapidly. Under this program, the business owner typically makes a down payment of 10 percent, a bank provides a loan of 50 percent of the cost, using the building as collateral, and a Certified Development Company (CDC) covers the remaining 40 percent through a loan that is secured with a junior lean and fully backed by the SBA. A CDC is a nonprofit community development corporation.

In 2008, lenders made about $18 billion in 7(a) and 504 loans. In addition to these two major loan programs, the SBA also has a Microloan Program that backs small business loans of up to $35,000.