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Small-Firm Credit Markets, SBA-Guaranteed Lending, and Economic Performance in Low-Income Areas

SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. The rationale for providing SBA loan guarantees is often based on the argument that they reduce credit rationing in low-income markets for small business loans. In this paper we empirically test whether SBA-guaranteed lending has a greater impact on economic performance in low-income markets. Using local labor market employment rates as our measure of economic performance, we find evidence consistent with this proposition. In particular, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA-guaranteed lending in that local market. And the intensity of this correlation is relatively larger in low-income markets. Indeed, one interpretation of our results is that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA-guaranteed lending in particular.

JEL classification: G38, H81, O16

Keywords: low income areas, employment rates, small business, credit markets, loan guarantees, credit rationing

Suggested citation: Craig, Ben R., William E. Jackson III, and James B. Thomson, 2006. "Small-Firm Credit Markets, SBA-Guaranteed Lending, and Economic Performance in Low-Income Areas," Federal Reserve Bank of Cleveland, Working Paper no. 06-01.

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