Public lending markets, specifically the Small Business Association’s (SBA) loan programs, remain a critical source of capital for US small businesses. With 90 percent of businesses categorized as small to mid-sized—and one out of three shuttering due to lack of finance—equitable funding opportunities help advance the entire business community.
According to David Stillerman, Kogod’s new professor of finance, SBA initiatives like the Paycheck Protection Program (PPP) and 7(a) Program may actually contribute to inequities and financial insecurity for small businesses.
“The policy structure of these programs may benefit high-risk businesses over low-risk because of how banks are incentivized,” says Stillerman. “This means more enterprises are likely to default on their loans—making it more difficult to support equitable access to funding.”
In his recent research, Stillerman, who earned his PhD in economics from Northwestern University, proposes potential policy interventions to mitigate these imbalances, like issuing less generous loan guarantees that keep banks accountable. He wants to ensure small businesses have equitable funding access so companies of all types and backgrounds can thrive.
Read on to learn more about Stillerman’s work and why policy change can help drive equitable change.
Kogod School of Business: One of your core research areas is small business lending markets, specifically government loan programs like Paycheck Protection Program (PPP) and the Small Business Administration’s 7(a) program. What makes these initiatives important to examine?
David Stillerman: The goal of these programs, especially the 7(a) program, is to expand credit for small businesses that are traditionally pretty credit constrained: Think your local store, corner grocery, or small daycare. By expanding credit, small businesses can also expand employment and address market failures that would otherwise hinder businesses’ ability to access funding. This can ideally help to create a more diverse, equitable, and innovative sector by ensuring businesses of all types and backgrounds have the opportunity to thrive.
The problem is, though, these government lending programs also provide incentives for banks to shirk on screening; there’s less incentive to determine which are quality small businesses.