Small Business Lending in Financial Crises: The Role of Government-Guaranteed Loans

January 24, 2023

Small Business Lending in Financial Crises: The Role of Government-Guaranteed Loans
John Hackney
Review of Finance, Volume 27, Issue 1, February 2023, Pages 247–287,

The role of the government in ensuring access to credit for small businesses has been the focus of considerable research and policy debate. The disproportionately negative effect of the COVID-19 pandemic on small businesses has once again brought this subject to the fore. Much of the discussion arises from the belief that small firms are the engine of economic growth, yet face significant difficulty in accessing the credit markets on which they depend. Small business credit access is a particularly relevant topic during crises, when research shows bank-dependent firms face even greater difficulty obtaining capital.

I ask in this paper whether and how a particular type of indirect government intervention, partial credit guarantees, can ease financial constraints for small businesses during crises, and whether this can in turn translate to better real outcomes. I use geographic variation in the presence of lenders who participate in the Small Business Administration’s 7(a) loan program to answer this question, along with a novel IV analysis exploiting the distance between these lenders and the SBA’s loan processing center.

The results indicate that during the 2007-2009 financial crisis, areas with a greater share of Small Business Administration 7(a) lenders experienced: 1) a 2.2% increase in small business loan volume, 2) a 3.7% increase in small firm employment and 3.5% increase in establishments, and 3) lower loan default rates. Bank-county-year analysis suggests that SBA banks increase their share of lending when they are capital-constrained, and when local median income is lower. The findings suggest that targeted government support can play a beneficial role in the presence of private credit market frictions, especially when bank capital is limited and small business financial constraints are severe.