Small Firm Credit Market Discrimination, Small Business Administration Guaranteed Lending, and Local Market Economic Performance

Abstract

In this article, the authors empirically test whether Small Business Administration (SBA) guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. This hypothesis is based on the assumptions that (1) credit rationing is more likely to occur in markets with a higher percentage of minority small businesses; and (2) SBA guaranteed lending is likely to reduce these credit rationing problems, thus improving economic performance in the local market. Using local market employment rates as the measure of economic performance, the authors find evidence consistent with this proposition. Specifically, the authors find a positive and significant impact of SBA guaranteed lending on the average employment rate in a local market. And, this impact is 200 percent larger in markets with a high percentage of potential minority small businesses. This result has important implications for public policy in general and SBA guaranteed lending in particular.