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Competitive and Special Competitive Opportunity Gap Analysis of the 7(a) and 504 Programs

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Document date: January 01, 2008
Released online: January 17, 2008

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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This study analyzes the extent to which the SBA's 7(a) and 504 programs serve borrowers facing capital gaps. Comparative and market share analyses show that women-, minority-owned, and start-up firms accounted for a higher share of the loans and larger share of lending volume under the 7(a) and 504 Programs compared to such firms' share of conventional small business loans. 7(a) and 504 loans went to firms that, on average, had lower sales and fewer employees than firms that received conventional small business loans. These differences suggest that SBA’s 7(a) and 504 Programs served borrowers who face a capital gap.


One of the SBA’s strategic goals is to “increase small business success by bridging competitive opportunity gaps facing entrepreneurs” (SBA 2004). “Competitive opportunity gaps exist when market or other conditions prevent small businesses from taking advantage of private financing or from competing for work contracts” (SBA 2004). Some of these businesses are owned by “groups that own and control little productive capital because they have limited opportunities for small business ownership” (SBA 2004). These groups consist of minorities, women, and veterans, or those who conduct business in rural or distressed urban areas (SBA 2004). Businesses whose owners belong to these special categories are deemed to face special competitive opportunity gaps (SCOGs).

The SBA Office of Capital Access helps bridge competitive opportunity gaps by encouraging lending to small businesses that otherwise would not qualify for financing which is not guaranteed, obtain equity, or take advantage of procurement opportunities. The research presented here will focus on two selected Office of Capital Access lending programs—the 7(a) Loan Guaranty Program (the 7(a) Program) and the Certified Development Company (CDC) 504 Loan Program (the 504 Program). For the purposes of this report, we define “competitive opportunity gaps” to mean the same as “capital gaps,” which have received extensive treatment in the literature.

The two SBA programs included in this study were created to ameliorate “imperfections in the Nation’s capital markets result in allocating to the small business sector of the economy less capital than would be allocated by a properly functioning financial system operating solely on the potential profitability of its use” (Garvin 1971). An early (1958) Federal Reserve report to the House and Senate Banking and Currency and Small Business Committees referenced background studies showing that “there is an unfilled margin, perhaps a rather thin one, between the volume of funds available to small concerns in general, and to new firms in particular, and the volume that could be put to use without prohibitive risk” (Garvin 1971).

Small businesses may face capital gaps because of a variety of reasons, including the risky nature of small businesses, especially start-ups; the difficulties of assessing credit-worthiness; the heterogeneity of small firms, which complicates development of underwriting standards; and the high costs of underwriting small business loans. In addition to these risks, small businesses often lack detailed balance sheets and other financial information that lenders typically use to underwrite a business loan application. This lack of information leads to “informational opacity” that increases the costs for potential credit providers to evaluate small business loan applications. While credit scoring of business has been used to assess risk in consumer lending for over three decades, it has only began in small business lending in the past decade. Further, it is unclear to date how reliable such information will prove in assessing small business risk (Board of Governors of the Federal Reserve System 2002).

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Topics/Tags: | Cities and Neighborhoods | Economy/Taxes | Employment

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