Small Business Loans Rise With Small Business Defaults

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The business of lending money to small businesses has entered a vicious cycle. The Small Business Administration says that it processed 12,393 loans in the fourth quarter of last year. That is up 9,070 in the same period in 2008. The SBA receives federal support to increase its loan activity, but the increase in activity may send a false signal about the recovery rate of small businesses in the US.

While the SBA is making more loans, small business defaults are rising quickly. Reuters reports that a recent research report from PayNet shows that November marked the 22nd consecutive month of loan accounts that are over 180 days past due. Most of the money from these obligations will never be collected. Loans that are in this “uncollectable” category are now almost 1% of all small business loans.

The SBA may find that the only way that banks will increase their exposure to small business credit will be if the SBA is willing to back the loans. This may stimulate small business activity, but it will add to the federal government’s deficit. It is a small part of loading the federal camel until its back is broken.

Douglas A. McIntyre