The Contribution of Small Business Loan Guarantees to Economic Development

Abstract

Analysis of the outcome of economic development programs is essential for improved public policy. This study reports on the California State Loan Guarantee Program, which guaranteed small business bank loans to carefully selected firms that could not otherwise obtain credit. The study tracked the actual change in employment at 1,166 firms that received 1,515 loan guarantees from 1990 to 1996 during the depths of the California recession. The study found that employment increased in firms receiving loan guarantees by 40% among all firms and 27% among nonagricultural firms. The program also increased state tax revenues by $25.5 million, well in excess of the $13 million the state spent on the program. Firms receiving loan guarantees had a default rate of only 2%.State programs that help small businesses access credit are important economic development tools

Public Credit Guarantee Schemes and SMEs’ Profitability: Evidence from Italy

“…To study EA, researchers have measured the impact of the public guarantee in terms of employment growth, tax revenues, increased sales, or profit growth rate. A large number of studies demonstrate a positive impact of the public guarantee on the employment growth rate (Bradshaw ; Lelarge, Sraer, and Thesmar ; Riding, Madill, and Haines ; Uesugi, Sakai, and Yamashiro ). Boocock and Shariff and Schmidt and van Elkan confirm the impact on employment and a positive effect on tax revenues.…”

Incrementality of SME Loan Guarantees

“…Parker (2002) and Cressy (2002), in their respective reviews of the literature, do not support that credit rationing is such that interventions are warranted. Bradshaw (2002) suggests that loan guarantee programs actually may be of direct financial benefit to society through job creation and additions to the tax base. Similar findings were reported by Riding and Haines (2001).…”

“…expansion of the volume of lending to SMEs (Cowling and Mitchell, 2003), 2. increases in employment and in tax revenues from the business and its employees (Riding and Haines 2001;Bradshaw, 2002); 3. (possibly) increases in exports of goods and services (Bradshaw, 2002); 4. banks potentially profit from the development of a relationship with SMEs.…”

“…expansion of the volume of lending to SMEs (Cowling and Mitchell, 2003), 2. increases in employment and in tax revenues from the business and its employees (Riding and Haines 2001;Bradshaw, 2002); 3. (possibly) increases in exports of goods and services (Bradshaw, 2002); 4. banks potentially profit from the development of a relationship with SMEs. Hence, guaranteed loans are sometimes used to generate new customers who may develop strong relationships with the lender and provide the lender with ancillary sources of profit from both commercial and personal banking services.…”

A Comparison between Formal and Informal Mutual‐credit Arrangements

“…Mutual‐guarantee systems are in general formed by potential borrowers who cannot offer, individually, enough collateral to secure a bank loan. These organizations are quite widespread in Eastern Asia (see, e.g., Boocock and Shariff ), North America (see Bradshaw ), and Europe. For the European case, Columba, Gambacorta, and Mistrulli () report that more than 1.4 million small and medium enterprises are currently members of mutual‐guarantee associations .…”