Impact of Small Business Administration Lending on State-Level Economic Performance : A Panel Data Analysis

Based on the few studies in their 2009 literature review, Craig, Jackson, and Thomson find that the economic impact of SBA loans on regional economic performance is positive, albeit small This study analyzes the relationships between economic performance and SBA lending using a panel of state-level data for the 1986-2008 period. It focuses primarily on the SBA 504-guaranteed lending program because this program's objective is to provide long-term financing to small firms. Through its Certified Development Companies working with local banks, the SBA is able to provide long-term, fixed rate loans so that businesses can acquire physical assets such as land and buildings and help generate jobs. Thus, the main purpose of this paper is to analyze and measure the impact of SBA 504 loans on various indicators of small business activity such as employment rate and per capita income, while also controlling for other determinants of state economic growth. A preliminary test showed that SBA lending is not endogenous at the state-level. As a result, moderated regression analysis was applied to the state-level panel data set whereby the dependent variable is regressed sequentially on certain control variables, independent variables, and then an interaction term. A version of Craig's model was estimated using three different dependent variables – income growth, small firm growth, and employee growth. The control variables of location quotient and NBER showed that local industrial composition and national business cycles are important determinants of state economic performance. The estimated coefficients for SBA lending were found to be small, insignificant, and had the unexpected negative signs with respect to its relationship with income. On the other hand, SBA loans had a positive and significant impact on the growth of small businesses and by consequence, the number of workers employed in small firms. The bank deposit variable had a positive and significant relation only with employee growth, albeit a very small effect. Finally, this study found that SBA lending was not biased in favor of lower income areas