The Impact of Lender Competition on Small Business Loan Pricing: Evidence from the SBA 7(a) Program

Abstract

We study the impact of lender competition on loan pricing using comprehensive loan-level data from the U.S. Small Business Administration (SBA) 7(a) program. Intended only for the most credit-constrained small businesses, SBA loans are originated in the banking sector and subsidized by the government through partial guarantees. In contrast to previous studies of small business lending markets, we find that greater competition is associated with lower SBA loan spreads. Further, we provide causal evidence for this relationship in a difference-in-differences analysis using bank mergers. Our results suggest that lending relationships are less important in the government-monitored-and-subsidized SBA loan market. As a result, hypothetical policies to encourage competition in the SBA loan market would benefit borrowers. Additionally, our findings support the use of product-market-specific concentration measures by regulators when evaluating bank mergers.

Keywords: small business lending, market power, government-subsidized loan programs

JEL Classification: G21, G28