The 7(a) program provides up to $5 million for eligible borrowers to spend on real estate, short- and long-term working capital, refinancing of current business debt and “furniture, fixtures and supplies.”
Private banks typically issue the loans, but a provision in the Build Back Better congressional spending bill would allow the government agency to use taxpayer funds to make loans directly to selected businesses.
The provision, known as Section 100502, or the Funding for Credit Enhancement and Small Dollar Loan Funding, would allocate nearly $4.5 billion over 10 years for the lending program.
Republican lawmakers, including Kennedy, and multiple banking associations have warned against crowding out private lending entities in favor of government workers. Kennedy and others sent a letter to Senate leadership in October, citing past abuses regarding singular SBA direct loan initiatives.
“The government shouldn’t encroach on a space where private lenders are already doing a good job getting funds to the small businesses that need them,” Kennedy said.
“Forcing community banks and local credit unions to compete with a massive government agency is inefficient and wrong,” Scott said. “Funneling tax dollars through the federal government in order to loan it back to small business owners with interest makes no sense.”
The SBA direct loan provision comes as part of a $25 billion small business package contained in the multitrillion dollar Democratic Build Back Better bill.
House Small Business Committee chair Rep. Nydia Velázquez, D-N.Y., has said the funding is critical to moving beyond the COVID-19 pandemic.
“Small businesses are the foundation of our economy and ultimately the key to our nation making a full economic recovery,” Velázquez said.
Kennedy referred to an inspector general’s report on the SBA’s Economic Injury Disaster Loan (EIDL) program as evidence for concern. The report estimated the government-run lending initiative advanced $79 billion in potentially fraudulent loans.
The inspector general’s office was alerted to potential fraud problems only when private banking institutions reported red flags upon receiving EIDL deposits, the report read.
“We have received complaints of more than 5,000 instances of suspected fraud from financial institutions receiving economic injury loan deposits,” the report read.