Small Business: A Comparison of SBA's 7(a) Loans and Borrowers With Other
Loans and Borrowers (Letter Report, 09/20/96, GAO/RCED-96-222).

Pursuant to a congressional request, GAO reviewed the role that the
Small Business Administration's (SBA) 7(a) Program plays in small
business financing, focusing on: (1) the characteristics of 7(a) loans
compared to small business loans in general; (2) how the characteristics
of 7(a) borrowers compare with small business borrowers that did not
obtain 7(a) loans; and (3) the reasons underlying private lending
institutions' decisions to participate or not participate in the 7(a)
program.

GAO found that: (1) as of June 1995, about 60 percent of SBA outstanding
7(a) loans were for amounts exceeding $100,000, compared to 18 percent
of small business loans in general; (2) 7(a) loans had longer maturities
and higher interest rates than non-7(a) loans; (3) 7(a) and non-7(a)
businesses tended to be organized as corporations, have the same average
number of employees, and focus on the services and retail trade; (4) the
majority of both 7(a) and non-7(a) borrowers tended to be nonminority
males; (5) the number of female-owned 7(a) businesses increased from
about 13.2 percent in fiscal year (FY) 1991 to 24.3 percent in FY 1995;
(6) 13.5 percent of 7(a) businesses were owned by minorities, compared
to 8.2 percent of non-7(a) businesses; (7) lenders who participated in
the 7(a) program believed that the program enabled them to offer loans
to new businesses, make longer-maturity loans, and offer loans to
businesses with less equity; and (8) the reasons cited by lenders who
did not participate in the 7(a) program included their company's limited
focus on small businesses, SBA time-consuming loan requirements, and the
lack of demand for 7(a) loans.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-222
     TITLE:  Small Business: A Comparison of SBA's 7(a) Loans and 
             Borrowers With Other Loans and Borrowers
      DATE:  09/20/96
   SUBJECT:  Small business loans
             Interest rates
             Lending institutions
             Government guaranteed loans
             Business development loans
             Women-owned businesses
             Minority businesses
             Loan defaults
IDENTIFIER:  SBA General Business Loan Program; SBA 7(a) Loan Program
             
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Cover
================================================================ COVER


Report to the Committee on Small Business, U.S.  Senate

September 1996

SMALL BUSINESS - A COMPARISON OF
SBA'S 7(A) LOANS AND BORROWERS
WITH OTHER LOANS AND BORROWERS

GAO/RCED-96-222

Comparison of SBA's 7(a) Loans and Borrowers With Others

(385609)


Abbreviations
=============================================================== ABBREV

  FDIC - Federal Deposit Insurance Corporation
  GAO - General Accounting Office
  NSSBF - National Survey of Small Business Finances
  SBA - Small Business Administration
  SIC - standard industrial classification

Letter
=============================================================== LETTER


B-272560

September 20, 1996

The Honorable Christopher S.  Bond
 Chairman
The Honorable Dale Bumpers
  Ranking Minority Member
Committee on Small Business
United States Senate

The U.S.  Small Business Administration's (SBA) General Business Loan
Program--referred to as the "7(a)" program--is the agency's primary
vehicle for providing small businesses with access to credit.  With a
few exceptions, SBA does not lend money directly under the program,
but rather guarantees up to 80 percent of each loan made by private
lenders to small firms.\1 This report responds to your request that
we provide information on the role that the 7(a) program plays in
small business financing.  Specifically, you asked that we provide
information on (1) how the characteristics--sizes, interest rates,
and maturities--of 7(a) loans compare with those of small businesses
that did not involve a guarantee from SBA and (2) how the
characteristics of 7(a) borrowers compare with small business
borrowers that did not obtain 7(a) loans.  In addition, you asked
that we provide information on reasons underlying private lenders'
decisions to participate or not participate in the 7(a) program. 

While this report compares 7(a) loans and borrowers with non-7(a)
loans (loans that do not carry a guarantee from SBA) and borrowers to
the extent practicable, for some factors the available data do not
allow for a direct comparison.  Data referred to as "non-7(a)" are
from a subsample of data from a 1994 survey of small businesses by
the Federal Reserve Board of Governors.\2

These survey data are representative of small businesses that applied
for and received credit in the last 3 years (generally, 1991 to
1993).  For information that our subsample did not include--on loans'
sizes, maturities, and interest rates--we used information on
commercial and industrial and other loans of $1 million or less. 
(Available research suggests that loans of $1 million or less, most
of which are not guaranteed under the 7(a) program, are typically
made to small businesses.) For simplicity, we speak of "small
business loans in general" when discussing these data describing
sizes, maturities, and interest rates.  Limitations on the
comparability of the data are provided where appropriate in the
report, and appendix V provides a detailed description of our
methodology and data sources. 


--------------------
\1 SBA has limited legislative authority to make direct loans to
borrowers who are unable to obtain loans from other lenders, but no
funds have been appropriated for this purpose since fiscal year 1995. 

\2 The Survey, cosponsored by SBA and the Federal Reserve, collected
data from 5,356 firms selected to provide a representative sample of
all U.S.  small businesses.  We obtained a subsample of data on 1,811
firms that applied for and received credit within the past 3 years. 
Details about the Survey are in app.  V. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Among the small business loans outstanding as of June 30, 1995, 7(a)
loans tended to be larger than small business loans in general.  For
example, almost 60 percent of the number of outstanding 7(a) loans
were for original amounts of more than $100,000, while about 18
percent of the number of small business loans in general were of this
size.  Furthermore, 7(a) loans were more likely to be term loans
rather than loans under lines of credit,\3 and to have longer
maturities and higher interest rates than small business loans in
general. 

Like most small business borrowers that did not have 7(a) loans, most
7(a) borrowers were organized as a corporation (rather than a sole
proprietorship or partnership) and were in the service or retail
sectors of the economy.  Also, 7(a) borrowers had about the same
average number of employees as non-7(a) borrowers but were likely to
have fewer sales and assets and more likely to be new businesses. 
The largest percentage of 7(a) borrowers were located in the Pacific
region, and the largest percentage of non-7(a) borrowers were in the
East North Central region.  Small businesses with 7(a) loans and
those with non-7(a) loans tended to be primarily owned by males. 
Finally, small businesses with 7(a) loans were somewhat more likely
to be owned by members of minority groups than were those with
non-7(a) loans. 

Many of the 38 participating lenders we interviewed said that the
7(a) program enabled them to offer loans to new businesses and to
businesses that have less equity and to make loans with longer
maturities than would otherwise be the case.  Among the reasons for
not offering 7(a) loans cited by the 23 nonparticipating lenders we
interviewed were that their company did not focus on small
businesses, SBA's loan requirements were too extensive and
time-consuming, and they did not perceive any demand for 7(a) loans. 


--------------------
\3 Borrowers who receive term loans typically receive a lump sum
amount and are then required to make monthly payments of principal
and interest.  Under a line of credit, a borrower is allowed to draw
down funds as needed up to a specified limit; a drawdown is
recognized as a loan and is subject to specified rate and maturity
terms. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Authorized under section 7(a) of the Small Business Act (15 U.S.C. 
636(a)), the 7(a) program is the largest of SBA's programs for
providing capital to small businesses.  In fiscal year 1995, SBA
approved about 56,000 7(a) loans totaling approximately $8.3
billion.\4 As of June 30, 1995, SBA's 7(a) loan portfolio was
composed of 140,517 loans with outstanding balances totaling $23.5
billion. 

SBA receives budget authority each fiscal year to cover the expected
federal cost of the loans approved during the year.  Federal costs
are incurred when borrowers of guaranteed loans default and SBA
recovers less than the total amount due.  SBA also incurs
administrative costs for the program.  Program costs are offset in
part by fees paid by both borrowers and lenders.\5

To obtain a 7(a) loan guarantee, a lender must document that the
prospective borrower was unable to obtain financing under reasonable
terms and conditions through normal business channels.  The borrower
may use the loan proceeds to establish a new business or to assist in
the operation, acquisition, or expansion of an existing business. 
The borrower repays the loan and associated fees through payments to
the lender. 

SBA's 7(a) loans represent a relatively small percentage of banks'
overall lending to small businesses and an even smaller percentage of
financing from all known sources.  As of June 30, 1995, 7(a) loans
accounted for only about 6.7 percent of the estimated total dollar
amount of outstanding small business loans of $1 million or less
originated by U.S.  commercial banks and insured savings
institutions.\6 Furthermore, 7(a) loans represent an even smaller
proportion of small business credit obtained from all known sources,
including finance and leasing companies. 


--------------------
\4 SBA's appropriation for the 7(a) program for fiscal year 1995 was
$7.8 billion.  The total amount of loans approved under the program
may be higher than the amount appropriated in a given fiscal year
because some loans are cancelled or reduced during the same year in
which they are approved, thereby allowing SBA to reuse the guaranty
authority.  SBA actually "obligated" approximately $7.8 billion in
guarantees made under the program as of the end of fiscal year 1995. 

\5 For historical information on the program over the last 10 years,
see Trends in SBA's 7(a) Program (GAO/RCED-96-158R, June 10, 1996). 

\6 This analysis refers to loans recorded by lenders as commercial
and industrial loans or "nonfarm nonresidential" mortgage loans. 


   CHARACTERISTICS OF 7(A) AND
   OTHER SMALL BUSINESS LOANS
------------------------------------------------------------ Letter :3

Our comparison of 7(a) and other loans of $1 million or less showed
the following: 

  -- As of June 30, 1995, 59.4 percent of the number of outstanding
     7(a) loans had original amounts over $100,000, compared with
     17.9 percent for the number of small business loans in general. 
     Moreover, about 88.9 percent of SBA's 7(a) loan dollars were
     used to make loans over $100,000, compared with 69.2 percent for
     small business loans in general.  However, in recent years there
     has been an increasing percentage in the number of 7 (a) loans
     under $100,000 and in the loan dollars for loans of this size. 

  -- About 2.1 percent of the number of 7(a) loans were under lines
     of credit, compared with about 51.5 percent of the number of
     non-7(a) loans.\7

  -- The average maturities for 7(a) loans were longer than those for
     small business loans in general.  For example, among
     variable-rate loans between $100,000 and $499,999, the average
     maturity for the 7(a) loans exceeded the average maturity for
     small business loans in general in each quarter of fiscal years
     1991 through 1995.  In fiscal year 1995, the average maturity
     for these 7(a) loans ranged from a low of 13.3 years to a high
     of 13.9 years; for the small business loans in general, the
     average maturity was 3.3 years in each quarter.  Similar
     patterns held for fixed-rate 7(a) and general small business
     loans in the same category, and for both variable- and
     fixed-rate 7(a) and general small business loans of less than
     $100,000 for fiscal years 1991 through 1995. 

  -- For most quarters of fiscal years 1991 through 1995, the average
     interest rates for 7(a) loans exceeded those for small business
     loans in general in the following categories:  variable-rate
     loans of less than $100,000 and between $100,000 and $499,999
     and fixed-rate loans between $100,000 and $499,999.  An
     exception to this pattern was fixed-rate loans under $100,000,
     for which the interest rates for general small business loans
     exceeded those for 7(a) loans over most quarters during the
     period. 

Additional details about the characteristics of 7(a) and other loans
are in appendix II. 


--------------------
\7 According to a study performed by a small business trade
organization, term loans in general are not more likely to have
higher interest rates than loans drawn under lines of credit, all
else being equal.  It is more difficult to generalize about
differences in maturities between term loans and loans drawn under
lines of credit. 


   CHARACTERISTICS OF 7(A) AND
   NON-7(A) BORROWERS
------------------------------------------------------------ Letter :4

Data show that 7(a) borrowers are similar to their non-7(a)
counterparts in terms of their businesses' organizational form, the
economic sector they are a part of, their geographic distribution,
the average number of employees, and the gender of the primary
owner(s).  The 7(a) and non-7(a) borrowers differ somewhat in terms
of their average sales and assets, the ethnicity of the primary
owners, and the likelihood of being a new business. 

More specifically, for borrowers whose loans were $1 million or less
we found the following: 

  -- In both groups, most businesses were organized as corporations. 
     Among 7(a) borrowers, 56.8 percent were organized as
     corporations; 34.6 percent were organized as sole
     proprietorships; and 8.6 percent were organized as partnerships. 
     Among non-7(a) borrowers, 59.9 percent were organized as
     corporations; 30.7 percent were sole proprietorships; and about
     9.4 percent were partnerships.  These patterns were generally
     similar across census regions. 

  -- While SBA did not distinguish between full-time and part-time
     employees, the overall mean number of employees was similar for
     7(a) and non-7(a) borrowers.  The mean number of employees of
     7(a) borrowers was 16.4.  In comparison, the mean number of
     full-time employees of non-7(a) borrowers was 13.1, and the mean
     number of full- and part-time employees combined was 16.8. 

  -- Both 7(a) and non-7(a) borrowers with fewer employees were
     likely to be sole proprietorships; as the number of employees
     increased, businesses were more likely to be organized as
     corporations.  We found this pattern to be consistent across
     regions. 

  -- Most 7(a) and non-7(a) borrowers were primarily engaged in
     services and retail trade.  These two categories accounted for
     30.9 percent and 29.3 percent, respectively, of the 7(a)
     businesses, and 28.4 percent and 21.1 percent, respectively, of
     the non-7(a) businesses.  Other areas of business that large
     percentages of both groups indicated as their primary areas
     included construction, manufacturing, and wholesale trade. 
     Generally, we found similar patterns across regions. 

  -- About 86.1 percent and about 82.9 percent of 7(a) and non-7(a)
     businesses, respectively, were male-owned.  In recent years,
     however, the percentage of 7(a) businesses owned by females has
     increased, from about 13.2 percent in fiscal year 1991 to about
     24.3 percent in fiscal year 1995.  We do not have comparable
     data on non-7(a) businesses over this time period. 

  -- About 86.5 percent of the 7(a) businesses were owned by
     nonminorities, and about 13.5 percent were owned by minorities. 
     For the non-7(a) businesses, ownership was 91.8 percent
     nonminority and 8.2 percent minority. 

  -- We estimate that 7(a) borrowers with loans serviced in Little
     Rock, Arkansas, and Fresno, California, had fewer sales and
     assets than non-7(a) borrowers.\8 These 7(a) borrowers had
     estimated annual average sales of between $958,266 and
     $1,203,763; in comparison, data from the National Survey of
     Small Business Finances show estimated annual average sales of
     $2,148,677 for non-7(a) borrowers.  Similarly, the estimated
     average value of the assets of the 7(a) borrowers was between
     $434,167 and $542,111, compared with the estimated average
     assets of $1,094,827 for non-7(a) borrowers, as shown by the
     Survey. 

  -- The greatest percentage of 7(a) borrowers were located in the
     Pacific (21.2 percent), West North Central (13.9 percent), and
     West South Central (12.6 percent) census regions.  The greatest
     percentage of non-7(a) firms were located in the East North
     Central (18.5 percent), South Atlantic (15.5 percent), and
     Pacific (14.6 percent) regions. 

  -- A larger percentage of the 7(a) firms were characterized as new
     businesses than were non-7(a) firms--22.1 percent versus 0.4
     percent, respectively. 

Additional details about the characteristics of 7(a) and non-7(a)
borrowers are in appendix III. 


--------------------
\8 Currently, SBA is in the process of centralizing all of its
commercial 7(a) loan servicing at two locations--Little Rock, Ark.,
and Fresno, Cal.  At the time of our review, these two service
centers accounted for about 39 percent of the number of 7(a) loans
approved in fiscal year 1993. 


   REASONS UNDERLYING LENDERS'
   DECISIONS TO PARTICIPATE OR NOT
   PARTICIPATE
------------------------------------------------------------ Letter :5

We interviewed 61 lenders to determine the underlying reason(s) for
their participation or nonparticipation in the 7(a) program.  We
interviewed 21 lenders selected from among lenders that account for a
relatively high volume of 7(a) loans and 17 lenders selected because
they make a relatively low volume of 7(a) loans.  We also interviewed
23 nonparticipating lenders.  Details about the interviews and the
lenders' responses are in appendix IV. 

Most of the high-volume lenders cited as primary reasons for
participating in the 7(a) program the abilities to offer loans to new
businesses, to make longer-maturity loans, and to offer loans to
businesses that have less equity.  However, 15 of the 21 high-volume
lenders indicated that the increase in program fees might cause them
to reduce their participation.\9 Seven of the 21 high-volume lenders
also indicated that they might reduce their participation in the 7(a)
program if the guaranty percentage (that is, the portion of each loan
that SBA guarantees, currently limited to 80 percent) continues to
decrease.  Three of the 21 indicated that their participation may
decrease if funding for the program remains uncertain. 

Most of the 17 low-volume lenders indicated that offering loans to
businesses that have less equity and offering loans to new businesses
were principal reasons for their participation in the program.  In
addition, 9 of the 17 low-volume lenders cited the following as
factors that might cause them to increase their participation in the
program:  a reduction in program fees, a reduction in paperwork and
documentation requirements, an increase in the demand for loans, an
increase in the guaranty percentage, and obtaining "preferred lender"
status.\10

The 23 nonparticipating lenders cited the following as reasons why
they did not participate in the program:  They have a different
business focus (i.e., they are not oriented to small businesses);
SBA's loan documentation requirements are too extensive and
time-consuming; they do not perceive a demand for 7(a) loans; they
lack experience with the 7(a) program; and the loan terms would not
be favorable to their borrowers. 


--------------------
\9 The Small Business Lending Enhancement Act of 1995 provides for an
increase in the guaranty fee based on the guaranteed portion of the
loan.  The act also provides for an annual fee for all SBA-guaranteed
loans on the basis of their size; lenders are required to pay this
fee and cannot pass it on to the borrower. 

\10 Preferred lenders have the authority to attach a guarantee from
SBA with no credit review by the agency.  SBA does review borrowers'
applications submitted by preferred lenders for eligibility before
issuing a loan identification number.  Preferred lender status is
conferred on lenders on the basis of their expertise and experience
in making SBA loans and their performance record. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We provided a draft of this report to SBA for its review and comment. 
We met with SBA officials, including the Director, Office of Loan
Programs, Office of Financial Assistance, who generally agreed with
the facts presented in the report.  They also suggested clarifying
certain aspects of the report and making minor changes to make the
report more technically accurate.  We incorporated SBA's comments
into the report where appropriate. 


---------------------------------------------------------- Letter :6.1

To respond to your request, we obtained information from SBA's
management information database on the characteristics of 7(a) loans
approved in fiscal years 1991 through 1995.  We also used the
database to obtain information on certain characteristics of 7(a)
borrowers.  We obtained information on borrowers' sales and assets
from paper files at SBA's service centers in Little Rock, Arkansas,
and Fresno, California.  For data on small business loans in general,
we used information from the Federal Reserve Board of Governors'
statistical releases and information provided by the Federal Deposit
Insurance Corporation.  When they were available, we obtained data on
non-7(a) loans and borrowers from the National Survey of Small
Business Finances. 

While we did not independently verify the accuracy or test the
reliability of the data from SBA or the Federal Reserve Board of
Governors, we performed tests to check the internal consistency of
the data and compared them with the data reported in SBA's and the
Federal Reserve's documents.  We worked closely with agency officials
to ensure our proper interpretation of the data, but we did not
attempt to determine the reasons for observed similarities and
differences between the 7(a) and non-7(a) loans and borrowers. 

In addition, we interviewed lenders that participated in the 7(a)
program and other lenders that did not.  We also interviewed
officials of SBA; the Federal Reserve; and several industry groups,
including the National Federation of Independent Business, the
National Association of Government Guaranteed Lenders, National Small
Business United, and the American Bankers Association.  Details on
our methodology are in appendix V.  We conducted our work between
December 1995 and July 1996 in accordance with generally accepted
government auditing standards. 

As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 7 days after the date of this letter.  At that time, we will
provide copies to the Administrator of SBA, the Chairman of the
Federal Reserve Board of Governors, appropriate congressional
committees, and other interested parties.  We will also make copies
available to others upon request. 

Should you or your staff have any questions, you can reach me at
(202) 512-7631.  Major contributors to this report are listed in
appendix VI. 

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues


BACKGROUND
=========================================================== Appendix I

Small firms continue to be recognized as key job creators and
innovators in the U.S.  economy.  According to the Small Business
Administration's (SBA) Office of Advocacy, there are approximately
22.1 million nonfarm businesses in the United States, of which about
99 percent are considered small.\1 Small businesses employ 53 percent
of the private workforce, contribute 47 percent of all sales in the
country, and are responsible for 50 percent of the private gross
domestic product.  Moreover, small businesses dominate certain
industries, such as restaurants, medical and dental facilities, and
counseling and rehabilitation services.  Between December 1994 and
December 1995, employment in industries dominated by small businesses
increased 2.7 percent, generating 1.25 million new jobs, or 75
percent of the total number of new jobs created. 


--------------------
\1 Generally, the size of small businesses is determined by their
respective industries and may be based on either the number of
employees or average sales over the last 3 years. 


   SMALL BUSINESS FINANCING
--------------------------------------------------------- Appendix I:1

Despite their recognized importance as a generator of economic
activity, small businesses face burdens that limit their potential. 
During the recent 1995 White House Conference on Small Business, most
participants indicated that access to credit and capital is a major
barrier to entry and growth. 

Unlike large firms, which have access to capital and financing from
sources such as the stock, bond, and commercial paper markets, small
firms rely to a greater extent on commercial banks for their
financing needs.  However, small firms often lack the collateral
needed to secure conventional commercial loans. 


   SBA'S 7(A) LOAN GUARANTY
   PROGRAM
--------------------------------------------------------- Appendix I:2

In the 1930s, 1940s, and early 1950s, the Department of Commerce, the
Federal Reserve Board, and others conducted independent studies of
small business financing.  These studies concluded that, in
comparison to large businesses, small and medium-sized businesses
faced a serious credit gap because their access to equity and bond
markets was limited and banks were generally reluctant to lend them
money on a long-term basis.  Section 7(a) of the Small Business Act,
as amended, (15 U.S.C.  636(a)) authorized SBA to make direct loans
or to guarantee loans made by private lenders to small businesses. 
The 7(a) program enables repayment terms and collateral requirements
that better fit the borrowers' needs than might be obtainable under
usual bank policy and transfers the major risk of borrowers' default
from the private lender to SBA. 

Since SBA's inception in 1953, the agency has provided financial
assistance totaling more than $167 billion to more than 1.2 million
businesses.  In fiscal year 1995, the SBA approved about 56,000 7(a)
loans for a total of about $8.3 billion.\2 The 7(a) loan guaranty
program is the agency's primary small business financing initiative. 

SBA operates approximately 30 subprograms under the overall 7(a)
umbrella.  Most of these subprograms guarantee loans for fixed terms,
but a small percentage of SBA's guarantees are for loans made under
lines of credit.  SBA's 7(a) guaranteed term loans are typically used
to finance things such as the purchase of a new business, the
expansion of an existing business, or capital improvements.  Loans
made under lines of credit may serve a variety of purposes, and, in
the commercial market, typically have maturities of less than a year. 

SBA receives budget authority each fiscal year to cover the expected
federal cost of the loans approved during the year.  Federal costs
are incurred when borrowers of guaranteed loans default and SBA
recovers less than the total amount due.  (In the event of a default,
SBA purchases the agreed-upon share of the unpaid balance of the
loan.) SBA also incurs administrative costs for the program.  Program
costs are offset in part by fees paid by both borrowers and lenders. 

SBA's 7(a) loans represent a relatively small percentage of overall
bank lending to small businesses and an even smaller percentage of
financing from all known sources.  According to information provided
by SBA and the Federal Deposit Insurance Corporation (FDIC), as of
June 30, 1995, 7(a) loans accounted for only about 6.7 percent of the
estimated dollar amount of outstanding small business loans of $1
million or less originated by U.S.  commercial banks and insured
savings institutions.\3 Moreover, according to SBA's Office of
Advocacy, 7(a) loans represent a much smaller proportion of overall
small business financing because, in addition to bank loans, small
businesses obtain financing through a variety of other means,
including finance companies, leases, and home equity loans.  Also,
some banks may make small business loans through credit cards or
other forms of consumer credit, which are generally not included in
estimates of small business lending. 


--------------------
\2 SBA's appropriation for the 7(a) program for fiscal year 1995 was
$7.8 billion.  The total amount of loans approved under the program
may be higher than the amount appropriated in a given fiscal year
because some loans are cancelled or reduced during the same year in
which they are approved, thereby allowing SBA to reuse the guaranty
authority.  SBA actually "obligated" approximately $7.8 billion in
guarantees made under the program as of the end of fiscal year 1995. 

\3 SBA provided information on outstanding 7(a) loans.  The remainder
is based on information obtained from FDIC that was filed by U.S. 
commercial banks in Consolidated Reports of Condition and Income
(Call Reports) and filed by insured savings institutions in Thrift
Financial Reports.  Both reports contain information on estimates of
the number and amount of outstanding small business loans. 


   GENERAL ECONOMIC CONDITIONS
   DURING THE PERIOD OF OUR STUDY,
   FISCAL YEARS 1991-95
--------------------------------------------------------- Appendix I:3

Commercial and industrial lending activity provides a measure of
business borrowing from banks.  In late 1990--the beginning of the
time period during which the loans we examined were made--the economy
had entered a recession.  Growth in commercial and industrial loans
made by banks had slowed, and in 1991 there was an actual decline in
commercial and industrial loan activity.  Interest rates fell in 1991
and 1992.  In particular, the prime rate, a key indicator of rates
charged to commercial borrowers by banks, fell to 6 percent by the
middle of 1992 and remained at that level until early 1994, although
the prime rate remained high by historical standards when compared to
other interest rates.  Also, interest rate spreads (over the prime
rate) on large business loans were small and getting smaller when
compared to spreads on small business loans.  Toward the end of the
time period we examined, interest rates, including the prime rate,
increased and the general level of economic activity increased as the
economy emerged from the recession. 


CHARACTERISTICS OF 7(A) AND
NON-7(A) SMALL BUSINESS LOANS
========================================================== Appendix II

Compared with small business loans in general, 7(a) loans tended to
be larger.  Moreover, a greater proportion of SBA's 7(a) loan dollars
were for larger loans.  However, in recent years there has been an
increasing percentage in the number of 7 (a) loans under $100,000 and
in the loan dollars for loans of this size.  Also, SBA 7(a) loans
were more likely to be term loans, whereas non-7(a) loans were more
likely to be loans drawn down under lines of credit.  Finally,
compared with small business loans in general, 7(a) loans were more
likely to have longer maturities and higher interest rates.\1


--------------------
\1 See app.  V for a detailed description of our data and
methodology.  We used a subset of SBA's data on 7(a) loans spanning
fiscal year 1991 through fiscal year 1993 to compare to the data from
the National Survey of Small Business Finances. 


      7(A) LOANS WERE MORE LIKELY
      TO BE LARGER
------------------------------------------------------ Appendix II:0.1

As shown in figure II.1, a comparison of data on the number of
outstanding 7(a) loans and available information on the number of
outstanding general small business loans shows that a greater
percentage of outstanding 7(a) loans tended to be larger loans.\2 For
example, 59.4 percent of the 7(a) loans were greater than $100,000,
compared to 17.9 percent of the general small business loans. 

   Figure II.1:  Percentage of
   Outstanding 7(a) and General
   Small Business Loans, by Size
   of Loan, as of June 30, 1995

   (See figure in printed
   edition.)

Note:  The total number of 7(a) loans was 140,517, and the total
number of general small business loans was 6,247,380. 

Source:  GAO's analysis of SBA's and FDIC's data. 


--------------------
\2 The data on outstanding loans represent loans that were for
original amounts of $1 million or less and that still had outstanding
balances as of June 30, 1995. 


      7(A) LOAN DOLLARS WERE MORE
      LIKELY TO REPRESENT LARGER
      LOANS
------------------------------------------------------ Appendix II:0.2

For outstanding loans with original amounts of $1 million or less as
of June 30, 1995, a greater proportion of SBA's lending has gone for
loans with larger original amounts, compared with lending to small
businesses in general reported by commercial banks and insured
savings institutions.  As illustrated in figure II.2, 65.5 percent
($15.4 billion) of the 7(a) loan dollars represented loans with
original amounts ranging from $250,001 to $1,000,000, compared to
49.0 percent ($171.4 billion) of the general small business loan
dollars. 

   Figure II.2:  Percentage of
   Outstanding 7(a) and General
   Small Business Loan Dollars, by
   Size of Loan, as of June 30,
   1995

   (See figure in printed
   edition.)

Note:  The total amount for 7(a) loans was $23.5 billion, and the
total amount for general small business loans was $350.0 billion. 

Source:  GAO's analysis of SBA's and FDIC's data. 

Although, for outstanding loans, the largest proportion of 7(a) loan
dollars has gone towards loans between $250,001 and $1 million, over
the last 5 years the largest percentage of 7(a) loans have been for
$100,000 or less.  As shown in figure II.3, between fiscal year 1991
and fiscal year 1995, the percentage of approved 7(a) loans with
amounts of $100,000 or less increased overall from 37.0 to 65.0
percent. 

   Figure II.3:  Percentage of
   Approved 7(a) Loans, by Size of
   Loan, Fiscal Years 1991-95

   (See figure in printed
   edition.)

Note:  The total number of approved 7(a) loans of $1 million or less
was 18,535 in fiscal year 1991; 23,561 in fiscal year 1992; 25,879 in
fiscal year 1993; 35, 121 in fiscal year 1994; and 54,173 in fiscal
year 1995. 

Source:  GAO's analysis of SBA's data. 

Over the last 5 years, the trends for approved loan dollars are
similar to those for the number of loans.  As figure II.4 shows,
between fiscal year 1991 and fiscal year 1995, the percentage of
approved 7(a) loan dollars in loans of $100,000 or less increased
overall from 9.9 to 25.8 percent. 

   Figure II.4:  Percentage of
   Approved 7(a) Loan Dollars, by
   Size of Loan, Fiscal Years
   1991-95

   (See figure in printed
   edition.)

Note:  The total amount of approved 7(a) loans of $1 million or less
was $4.1 billion for fiscal year 1991; $5.6 billion for fiscal year
1992; $6.3 billion for fiscal year 1993; $7.5 billion for fiscal year
1994; and $7.8 billion for fiscal year 1995. 

Source:  GAO's analysis of SBA's data. 


      SBA 7(A) LOANS WERE MORE
      LIKELY TO BE TERM LOANS
------------------------------------------------------ Appendix II:0.3

A comparison of 7(a) and non-7(a) data shows that 7(a) loans were
more likely to be term loans, whereas non-7(a) loans were more likely
to be under lines of credit.  As shown in figure II.5, a smaller
percentage of the number of 7(a) loans were under lines of credit
(2.1 percent), when compared with the number of non-7(a) loans (51.5
percent). 

   Figure II.5:  Percentage of
   7(a) and Non-7(a) Loans That
   Were Under Lines of Credit and
   That Were Term Loans

   (See figure in printed
   edition.)

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 

The percentage of 7(a) loans of $1 million or less under lines of
credit was 1.4 percent in fiscal year 1991, 1.3 percent in fiscal
year 1992, 3.2 percent in fiscal year 1993, 3.6 percent in fiscal
year 1994, and 0.9 percent in fiscal year 1995. 


      MATURITIES AND INTEREST
      RATES FOR 7(A) LOANS OFTEN
      EXCEEDED THOSE FOR GENERAL
      SMALL BUSINESS LOANS
------------------------------------------------------ Appendix II:0.4

A comparison of data from SBA and data published quarterly by the
Federal Reserve Board of Governors shows that between fiscal year
1991 and fiscal year 1995, 7(a) loans had longer maturities and often
had higher interest rates than small business loans in general.\3
Among loans with maturities of 1 year or more, general small business
loans were more likely to have variable rather than fixed interest
rates.  Loans under $100,000 were more evenly split between having
fixed and variable rates. 

As shown in figure II.6, the mean maturities for variable-rate 7(a)
loans between $100,000 and $499,999 exceeded those for variable-rate
general small business loans of the same size over fiscal years 1991
through 1995.\4

   Figure II.6:  Mean Maturities
   for 7(a) and General Small
   Business Loans Between $100,000
   and $499,999 With Variable
   Interest Rates, by Quarter,
   Fiscal Years 1991-95

   (See figure in printed
   edition.)

The maturities for these loans were 1 year and over. 

Source:  GAO's analysis of SBA's data and the Federal Reserve Board
of Governors' quarterly Survey of Terms of Bank Lending. 

The same trend as shown in figure II.6 held for fixed-rate 7(a) and
general small business loans in the same category and for both
variable- and fixed-rate 7(a) and general small business loans of
less than $100,000 over the same period. 

As shown in figure II.7, the mean interest rates for variable-rate
7(a) loans between $100,000 and $499,999 exceeded those for
variable-rate general small business loans of the same category over
fiscal years 1991 through 1995.  For loans under $100,000 with
variable interest rates, the trend was similar. 

   Figure II.7:  Mean Interest
   Rates for 7(a) and General
   Small Business Loans Between
   $100,000 and $499,999 With
   Variable Interest Rates, by
   Quarter, Fiscal Years 1991-95

   (See figure in printed
   edition.)

Note:  The maturities for these loans were 1 year and over. 

Source:  GAO's analysis of SBA's data and the Federal Reserve Board
of Governors' quarterly Survey of Terms of Bank Lending. 

While the mean interest rates for variable-rate 7(a) loans exceeded
those for general small business loans, this relationship did not
always hold true for fixed-rate loans.  As shown in figure II.8, for
loans between $100,000 and $499,999, the mean fixed interest rates
for 7(a) loans were not always higher than those for small business
loans in general. 

   Figure II.8:  Mean Interest
   Rates for 7(a) and General
   Small Business Loans Between
   $100,000 and $499,999 With
   Fixed Interest Rates, by
   Quarter, Fiscal Years 1991-95

   (See figure in printed
   edition.)

Note:  The maturities for these loans were 1 year and over. 

Source:  GAO's analysis of SBA's data and the Federal Reserve Board
of Governors' quarterly Survey of Terms of Bank Lending. 

In contrast, for loans less than $100,000, the mean fixed interest
rates for 7(a) loans were generally lower than those for small
business loans in general, as shown in figure II.9. 

   Figure II.9:  Mean Interest
   Rates for 7(a) and General
   Small Business Loans Less Than
   $100,000 With Fixed Interest
   Rates, by Quarter, Fiscal Years
   1991-95

   (See figure in printed
   edition.)

Note:  The maturities for these loans were 1 year and over. 

Source:  GAO's analysis of SBA's data and the Federal Reserve Board
of Governors' quarterly Survey of Terms of Bank Lending. 


--------------------
\3 We focused our analysis on two categories--loans of less than
$100,000 and loans between $100,000 and $499,999--because together
they account for 90.5 percent of SBA's 7(a) loans. 

\4 We compare 7(a) loans to general small business loans with
maturities of one year or greater.  We focused on this category of
general bank loans because of the long-term nature of 7(a) loans,
even though much bank lending to small business is for maturities of
less than one year. 


CHARACTERISTICS OF 7(A) AND
NON-7(A) BORROWERS
========================================================= Appendix III

We observed similarities and differences across selected
characteristics of 7(a) and non-7(a) borrowers.  The 7(a) borrowers
are similar to their non-7(a) counterparts in terms of their
businesses' organizational form, the economic sector they are part
of, the average number of employees, and the gender of the primary
owner(s).  The 7(a) and non-7(a) borrowers differ somewhat in terms
of their average sales and assets, their geographic distribution, the
ethnicity of the primary owners, and the likelihood of being a new
business.\1


--------------------
\1 See app.  V for a detailed description of our data and
methodology.  We used a subset of SBA's data on 7(a) loans spanning
fiscal year 1991 through fiscal year 1993 to compare to the data from
the National Survey of Small Business Finances. 


      BUSINESS CHARACTERISTICS
----------------------------------------------------- Appendix III:0.1

The geographic distribution of 7(a) and non-7(a) borrowers across
census regions appears to be somewhat different, as figure III.1
illustrates.  For example, the three regions with the highest
percentage of 7(a) loans were the Pacific, West North Central, and
West South Central regions.  In contrast, the top three regions for
non-7(a) loans were the East North Central, South Atlantic, and
Pacific regions. 

   Figure III.1:  Percentage of
   7(a) and Non-7(a) Borrowers, by
   Census Region

   (See figure in printed
   edition.)

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 

A comparison of data on 7(a) borrowers and non-7(a) borrowers shows
little difference in the form of business ownership--sole
proprietorship, partnership, or corporation.  Most 7(a) and non-7(a)
businesses were organized as corporations, as shown in figure III.2. 
In general, we found these patterns to be similar across census
regions. 

   Figure III.2:  Percentage of
   7(a) and Non-7(a) Borrowers, by
   Business Organization

   (See figure in printed
   edition.)

Note:  The percentage of non-7(a) borrowers that were organized as
corporations contains both S Corporations (24.9 percent) and C
Corporations (34.9 percent).  See footnote 10, app.  V, for a
discussion of these types of corporations. 

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governor's data. 

The average number of employees was similar for 7(a) borrowers and
non-7(a) borrowers.  Specifically, the mean number of employees in
7(a) firms was 16.4.  In comparison, the mean number of full-time
employees in non-7(a) firms was 13.1, and the mean number of full-
and part-time employees combined was 16.8.\2 In addition, as shown in
table III.1, the percentage of firms with various numbers of
employees was similar for 7(a) and non-7(a) borrowers.  We found
these patterns were consistent across regions. 



                              Table III.1
                
                 Percentage of 7(a) and Non-7(a) Firms,
                         by Number of Employees

                                                 10-   20-   50-  100-
Number of employees              1   2-4   5-9    19    49    99   499
----------------------------  ----  ----  ----  ----  ----  ----  ----
7(a) firms                    11.0  26.8  23.1  18.9  14.6   4.2   1.5

Non-7(a) firms
----------------------------------------------------------------------
Full-time employees           18.6  35.4  18.8  12.0   9.2   3.3   2.6
Full-and part-time employees   8.7  32.6  25.2  14.3  11.8   4.3   3.1
----------------------------------------------------------------------
Note:  According to SBA, a 7(a) firm cannot have zero employees, so
for consistency we eliminated zero values from the data on non-7(a)
firms.  We also eliminated firms with 500 or more employees from
SBA's data on 7(a) firms for consistency with the data from the
National Survey of Small Business Finances (NSSBF). 

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 

In addition to finding similarities between the two groups based on
separate overall comparisons of the form of business organization and
number of employees, we also found similarities between the two
groups when these characteristics were analyzed together.  We found
that both 7(a) and non-7(a) firms with fewer employees were likely to
be sole proprietorships; and, as the number of employees increased,
firms were more likely to be organized as corporations.  For example,
51.3 percent of 7(a) firms with two to four employees were sole
proprietorships, and 36.5 percent were corporations.  For 7(a) firms
with 100 or more employees, 7.1 percent were sole proprietorships,
and 88.7 percent were corporations.  We found a similar pattern for
non-7(a) firms. 

A comparison based on firms' standard industrial classification (SIC)
division shows similarities.  As shown in figure III.3, overall the
largest concentration of 7(a) and non-7(a) firms were primarily
engaged in services and retail trade.  Other areas that large
percentages of both groups indicated as their primary area of
business activity included construction, manufacturing, and wholesale
trade.  Generally, we found similar patterns across regions. 

   Figure III.3:  Percentage of
   7(a) and Non-7(a) Firms, by
   Primary Area of Business
   Activity

   (See figure in printed
   edition.)

Note:  The "Combined" category includes firms in agriculture, mining,
and public administration and "nonclassifiable" establishments (4.4
percent of 7(a) borrowers and 1.0 percent of non-7(a) borrowers).  It
also contains all SIC codes unassigned to any category (0.2 percent
of 7(a) borrowers and 9.7 percent of non-7(a) borrowers). 

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 

A comparison of data collected from SBA's files in Fresno,
California, and Little Rock, Arkansas, with similar information from
the NSSBF shows that the sales and assets of 7(a) and non-7(a) firms
appear to be different.  The estimated average annual sales for 7(a)
borrowers was $1,081,014, compared to $2,148,677 for non-7(a)
borrowers.  Some of the observed difference in these estimates may be
due to sampling error.\3

Similarly, the estimated average assets of the 7(a) borrowers was
$488,139, compared to $1,094,827 for non-7(a) borrowers.  Similarly,
some of the observed difference in these estimates may be due to
sampling error.\4

As shown in figure III.4, a larger percentage of 7(a) firms than
non-7(a) firms were new businesses. 

   Figure III.4:  Percentage of
   7(a) and Non-7(a) Firms, by
   Status as a New Business

   (See figure in printed
   edition.)

Note:  SBA defines a new business as one no older than 180 days (or 6
months).  The NSSBF's data were recoded to indicate a new firm as one
that is no older than 1 year.  According to Financial Services Used
by Small Businesses:  Evidence From the 1993 National Survey of Small
Business Finances, 15.3 percent of all firms are less than 5 years
old. 

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 


--------------------
\2 SBA's data included the number of employees as provided to the
lender by the borrower at the time of loan approval.  Data from the
National Survey of Small Business Finances included separate data
elements on full-time and part-time employees.  We based our
comparisons on (1) the number of full-time employees and (2) the sum
of full- and part-time employees. 

\3 At the 95-percent confidence level, the lower and upper bounds for
the estimate of the average annual sales for SBA's 7(a) borrowers at
Little Rock and Fresno are $958,266 and $1,203,763.  For the NSSBF's
estimate of the average annual sales for non-7(a) borrowers, we were
unable to compute the sampling error because the survey methodology
report had not been finalized within the time of our review. 

\4 At the 95-percent confidence level, the lower and upper bounds for
the estimate of the average assets of SBA's 7(a) borrowers at Little
Rock and Fresno are $434,167 and $542,111.  Again, we were unable to
compute the sampling error for the NSSBF's estimate of the average
assets for non-7(a) borrowers because the survey methodology report
had not been finalized during the time of our review. 


      CHARACTERISTICS OF OWNERS
----------------------------------------------------- Appendix III:0.2

As shown in figure III.5, overall about 86.1 percent of the 7(a)
firms were male-owned, and 82.9 percent of the non-7(a) firms were
male-owned.\5

   Figure III.5:  Percentage of
   7(a) and Non-7(a) Firms, by
   Gender of Primary Owner

   (See figure in printed
   edition.)

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 

In the past several years, however, the percentage of 7(a) firms
owned by females has increased, from about 13.2 percent in fiscal
year 1991 to about 24.3 percent in fiscal year 1995, as indicated in
figure III.6. 

   Figure III.6:  Percentage of
   7(a) Firms, by Gender of
   Primary Owner, Fiscal Years
   1991-95

   (See figure in printed
   edition.)

Source:  GAO's analysis of SBA's data. 

As shown in figure III.7, overall 13.5 percent of 7(a) and 8.2
percent of non-7(a) business owners were minorities. 

   Figure III.7:  Percentage of
   7(a) and Non-7(a) Firms, by
   Borrowers' Ethnic Category

   (See figure in printed
   edition.)

Note:  There is no overlap between any of these ethnic categories. 
The Hispanic category incudes all persons of Hispanic descent,
regardless of race.  For example, the Hispanic category could include
African-Americans, Asians or Pacific Islanders, and others.  All
persons not of Hispanic descent are divided among the remaining
categories.  These non-Hispanic categories may underrepresent the
percentage of firms owned by these groups. 

Source:  GAO's analysis of SBA's and the Federal Reserve Board of
Governors' data. 


--------------------
\5 Both SBA and the NSSBF define the primary ownership to be female
if more than 50 percent of the firm is owned by one or more women. 


REASONS UNDERLYING LENDERS'
DECISIONS TO PARTICIPATE OR NOT TO
PARTICIPATE
========================================================== Appendix iv

We interviewed representatives for 61 lenders to determine the
reasons underlying their participation or nonparticipation in SBA's
7(a) program.\1 In 1995, 21 of these lenders made a relatively high
number of 7(a) loans, 17 made only a few 7(a) loans, and 23 did not
participate in the program.\2 As shown in figure IV.1, these lenders
were located primarily in California, Florida, Illinois, New York,
and Texas--states with large numbers of 7(a) loans. 

   Figure IV.1:  Location of
   Lenders Contacted by GAO

   (See figure in printed
   edition.)

Note:  Symbols appear in the state in which lenders are located but
do not represent actual locations within the state. 


--------------------
\1 The titles of the lender representatives we talked to included
Presidents, Senior Vice-Presidents, Assistant Vice-Presidents, and
Commercial Loan Officers.  According to SBA officials, the reasons
given by the lender representatives could vary depending upon their
position in the organization.  For example, a high-ranking
representative might cite different reasons from those given by a
lower-ranking representative. 

\2 See app.  V for a detailed description of the method we used to
select these lenders.  In brief, the high-volume and low-volume
lenders were chosen from among lenders with the highest and lowest
number of loans, respectively, in fiscal year 1995.  Some of the 23
lenders that did not participate in SBA's 7(a) loan program in 1995
subsequently participated in 1996. 


   FACTORS CONTRIBUTING TO
   HIGH-VOLUME LENDERS' DECISIONS
   TO PARTICIPATE
-------------------------------------------------------- Appendix iv:1

As shown in table IV.1, the most frequently cited factors
contributing to a very great or great extent to lenders'
participation in the 7(a) program were the ability to offer (1) loans
to new start-up businesses or businesses without established
borrowing histories and (2) loans with longer maturities.  Also
important was the ability to make loans to businesses with less
equity than that required for non-7(a) loans. 



                               Table IV.1
                
                 Factors Contributing to 21 High-Volume
                Lenders' Decisions to Participate in the
                           7(a) Loan Program


                                  Very          Modera          Little
                                 great   Great      te    Some   or no
Factor                          extent  extent  extent  extent  extent
------------------------------  ------  ------  ------  ------  ------
Ability to offer loans to new        9       9       2       1       0
 start-up businesses or
 businesses without
 established borrowing
 histories
Ability to offer longer-            11       6       4       0       0
 maturity loans
Ability to offer loans to            8       8       5       0       0
 businesses with less equity
Ability to make loans to types       5       6       5       4       1
 of businesses for which the
 bank does not generally make
 conventional loans
Ability to sell SBA loans in         7       3       1       1       9
 the secondary market
Ability to make larger loans         6       3       2       0      10
 than regulated lending
 limits\a permit
Ability to offer more                1       1       9       3       7
 favorable interest rates
Ability to pledge the SBA-           0       1       4       1      15
 guaranteed portion of a loan
 as security for public funds
 or as collateral
----------------------------------------------------------------------
\a The guaranteed portion of a 7(a) loan does not count against a
bank's legal lending limit, which is imposed by legislation. 

Describing one of the most frequently cited factors, one lender
representative said the 7(a) program enables the bank to make loans
for business start-ups and expansions to borrowers that do not have
the cash flow necessary to qualify for conventional loans.  He said
without the 7(a) program, these small business owners would not be
able to obtain credit. 

Describing another factor, another lender representative said the
7(a) program allows the bank to provide borrowers longer loan terms
and is very important because many borrowers would not be able to
repay loans with shorter terms.  A longer term allows a small
business owner to repay the loan without depleting his working
capital, which, the lender representative explained, is the lifeline
of the small business.  Otherwise, keeping the note current could
cause the small business to go out of business eventually.  A
different lender representative said that because banks typically
make short-term loans, the flexibility to structure long-term SBA
loans is advantageous to the bank and borrowers. 

The ability to offer loans to businesses that have less equity than
that required for non-7(a) loans was the third most frequently cited
factor contributing to lenders' participation in the 7(a) program.  A
lender representative said that banks do not like to make
conventional loans to small businesses because they quite often lack
equity.  Overall, 12 lender representatives said the program allowed
the bank to extend credit to borrowers that would not be able to
obtain a loan through the bank's conventional lending practices. 

While many lender representatives were positive about the 7(a) loan
program, some expressed concerns.  For example, one high-volume
lender representative said banks are becoming polarized regarding
7(a) lending; either they participate in the program and make a lot
of loans, or they make none at all.  This representative added that
it is costly for a bank to get started in the program, but once in
place, the program can be profitable for the bank.  He believes it
would be advantageous for the program to have more selective lenders
participating because loan defaults would be lower.  He further
stated that nonbank lenders such as finance companies have an unfair
competitive advantage over banks in making 7(a) loans because banks
spend a great deal of time and money complying with bank regulations
and paying premiums and oversight fees to FDIC and the Office of the
Comptroller of the Currency.  Furthermore, he said the bank must pay
for a full-time compliance officer who ensures that the bank is
conforming to applicable regulations.  Because their cost structure
is lower, the nonbank lenders can offer more competitive rates for
7(a) loans. 


   FACTORS THAT MIGHT CAUSE
   HIGH-VOLUME LENDERS TO REDUCE
   PARTICIPATION
-------------------------------------------------------- Appendix iv:2

Of the 21 high-volume lenders, 18 said there were one or more factors
that might cause their participation in the program to decrease.  The
most frequently cited factor was the increase in the fees associated
with the program, cited by 15 lender representatives.  Some of these
lender representatives believe the increase in the guaranty fee\3

made the program expensive for potential borrowers (because the
lenders pass the fee on to them).  Other lender representatives said
the introduction of the 50-basis-point fee\4 made the program less
profitable for the bank.  One lender representative said the
increased guaranty fee was bordering on "exorbitant," making the
product not well received by potential borrowers.  Two lender
representatives said the number of 7(a) loans their banks have made
this year is down approximately 70 percent from a year ago because of
the increase in the guaranty fee.  One of these representatives added
that the higher fee had caused borrowers to become uninterested in
the program.  Five lender representatives said that if the fees
continue to increase, it may not be profitable for their banks to
participate in the program.  Another lender representative was
concerned that the increase in the guaranty fee will impair the
quality of SBA's portfolio.  He said that only the high-risk
borrowers will be willing to pay the increased fee, which will
ultimately result in higher defaults. 

According to one lender representative, the 50-basis-point fee that
the bank must pay SBA causes the bank to make smaller SBA loans.  He
said it may be appropriate to charge lenders 50 basis points on loans
that banks sell in the secondary market, but he believed it was
inappropriate for SBA to assess the fee on 7(a) loans that are not
sold in the secondary market. 

Another factor that, according to some high-volume lenders, could
cause them to reduce their participation is the reduction in the
percentage of a loan that the government can guarantee.\5 Seven
lender representatives cited this factor.  For example, one lender
representative said that if the government's guaranty percentage
continues to go down, his bank may curb its participation in the
program because its underwriting policies will not allow it to accept
more risk.  Another representative said that reducing the guaranty
percentage ties up the bank's capital. 

A third factor, which was cited by three lender representatives, was
uncertainty about the program's funding.  One lender representative
said that the program's funding has become too political and that the
bank does not know if SBA will continue to exist.  With all the
volatility surrounding SBA, he said, it is very difficult for the
bank to plan for lending backed by the agency.  Another lender
representative said it is difficult for the bank to devote
substantial resources to SBA programs that may or may not receive
funding each year.  One lender representative seemed to summarize
these concerns when he said that it had been a "rocky" couple of
years for the 7(a) program, with the increase in fees and the
government shutdown in the first quarter of fiscal year 1996.  He
said that with such events, the bank has difficulty maintaining
momentum in the program and that many potential customers lose
interest because of the volatility. 

Finally, one lender representative said she is noticing that customer
demand for 7(a) loans is slowing down at her bank.  She said this may
be due to the increase in competition among banks to make loans. 
According to her, some banks have loosened their credit underwriting
requirements and are making riskier loans--loans that would have been
made only with a government guarantee a year ago. 


--------------------
\3 The Small Business Lending Enhancement Act of 1995 provides for an
increase in the guaranty fee based on the guaranteed portion of the
loans.  The act preserves a 2-percent guaranty fee for 7(a) loans
with a guaranteed portion of $80,000 or less; for larger loans, the
fee will be on a blended scale as follows:  (1) 3 percent of the
guaranteed portion of a loan that is over $100,000 and up to
$250,000; (2) 3.5 percent of the guaranteed portion of a loan that is
over $250,000 and up to $500,000; and (3) 3.875 percent of the
guaranteed portion of a loan that is over $500,000. 

\4 A basis point is one one-hundredth (1/100) of 1 percent.  The
Small Business Lending Enhancement Act of 1995 provides for a
50-basis-point ongoing fee for all SBA-guaranteed loans.  Lenders are
required to pay this fee and cannot pass it on to the borrower. 
Prior to this, SBA was authorized to charge a 40-basis-point fee on
loans sold in the secondary market. 

\5 Since October 13, 1995, the maximum allowable guaranty percentage
has been 80 percent on loans of $100,000 or less and 75 percent of
all other loans not to exceed $750,000, unless otherwise authorized
by statute for a specific loan program.  Prior to this, the maximum
guaranty percentage was 90 percent on loans of $155,000 or less and
85 percent on loans over $155,000, except loans made by preferred
lenders, which carried a maximum guarantee of 70 percent. 


   FACTORS CONTRIBUTING TO
   LOW-VOLUME LENDERS' DECISIONS
   TO PARTICIPATE
-------------------------------------------------------- Appendix iv:3

The most frequently cited factors contributing to a very great or
great extent to the 17 low-volume lenders' decisions to participate
in the program were the ability to offer (1) loans to businesses that
have less equity than that required for non-7(a) loans and (2) loans
to new start-up businesses or businesses without established
borrowing histories, as shown in table IV.2.  For example, one lender
representative said that his bank primarily uses the 7(a) program for
small business owners who lack equity and for businesses just getting
started.  Seven lender representatives that made a low volume of 7(a)
loans said the program allows them to make credit available to those
who would not be able to obtain a loan otherwise. 



                               Table IV.2
                
                 Factors Contributing to 17 Low-Volume
                Lenders' Decisions to Participate in the
                           7(a) Loan Program


                                  Very          Modera          Little
                                 great   Great      te    Some   or no
Factor                          extent  extent  extent  extent  extent
------------------------------  ------  ------  ------  ------  ------
Ability to offer loans to           12       3       0       2       0
 businesses with less equity
Ability to offer loans to new       11       2       3       0       1
 start-up businesses or
 businesses without
 established borrowing
 histories
Ability to offer longer-             5       6       5       0       1
 maturity loans
Ability to make loans to types       3       8       4       2       0
 of businesses for which the
 bank does not generally make
 conventional loans
Ability to sell SBA loans in         3       2       3       1       8
 the secondary market
Ability to make larger loans         2       3       3       2       7
 than regulated lending
 limits\a permit
Ability to offer more                1       3       4       5       4
 favorable interest rates
Ability to pledge the SBA-           1       1       2       3      10
 guaranteed portion of a loan
 as security for public funds
 or as collateral
----------------------------------------------------------------------
\a The guaranteed portion of a 7(a) loan does not count against a
bank's legal lending limit, which is imposed by legislation. 

One low-volume lender representative said that his bank has a
difficult time selling the 7(a) program to the community.  Many
potential borrowers tell the bank's loan officers that they do not
want a 7(a) loan; the lender representative said that it appears many
in the community view the program negatively.  Another lender
representative said that SBA changes the program with very little
notice, which causes problems for the bank and its 7(a) customers. 
She said SBA could improve its communication with the lenders so that
they do not prepare 7(a) loan packages only to find out later that
the requirements have changed. 


   FACTORS THAT MIGHT CAUSE THE
   LOW-VOLUME LENDERS TO INCREASE
   PARTICIPATION
-------------------------------------------------------- Appendix iv:4

Of the 17 low-volume lenders we contacted, 9 cited factors that might
cause their participation to increase.  These factors were (1) a
reduction in the fees associated with the program, (2) a reduction in
the paperwork and documentation required for a 7(a) loan, (3) an
increase in the demand for 7(a) loans, (4) an increase in the
government's guaranty percentage, and (5) obtaining status as a
preferred lender.\6

Three of the lender representatives surveyed said that if the fees
were reduced, participation might increase.  For example, one lender
representative said that the fees are becoming very cumbersome and
that many potential 7(a) borrowers cannot afford them.  Another
lender representative said that SBA may be pricing itself out of the
market with the increase in the guaranty fee because many potential
customers are not willing to pay it. 

A different lender representative said that if the 50-basis-point fee
was eliminated, his bank would be inclined to participate in the
program more.  Two lender representatives indicated that a reduction
in the paperwork and documentation requirements might cause their
banks to increase participation.  One explained that the program
requires too much in terms of paperwork and documentation from
potential borrowers, such as resumes. 

Two lender representatives said an increase in the demand for 7(a)
loans in their communities would cause their banks to increase
participation in the program.  One lender representative said that an
increase in the government's guaranty percentage might cause her bank
to increase participation.  Finally, one lender representative said
that his bank's participation would increase if it could obtain
status as a preferred lender. 


--------------------
\6 Under the Preferred Lenders Program, SBA delegates to its best
private lenders the authority to approve a borrower's
creditworthiness and service SBA-guaranteed loans.  SBA retains the
authority to determine a loan's eligibility. 


   PRINCIPAL REASONS FOR LENDERS
   NOT PARTICIPATING IN THE
   PROGRAM
-------------------------------------------------------- Appendix iv:5

The 23 nonparticipating lenders we contacted provided the following
principal reasons for not participating in SBA's 7(a) program: 

  -- Lenders do not focus on small business lending.  This was the
     most frequently cited reason for nonparticipation.  Eight of the
     23 lenders focused their efforts on consumer lending, such as
     residential mortgage, auto, boat, small unsecured, home
     improvement, home equity, and passbook savings loans.  In
     addition, three of the lenders that do provide small business
     lending said that they met their customers' credit needs by
     providing financing without SBA's guarantee. 

  -- SBA's 7(a) loan-processing requirements are too extensive and
     time-consuming.  Eight of the lender representatives surveyed
     believe that SBA has time-consuming loan-processing procedures. 
     The representatives said that the 7(a) program requires a
     voluminous amount of documentation, which extends the processing
     time well beyond normal banking standards.  One of the
     representatives indicated that his bank could process a
     conventional loan in 2 to 3 days, whereas he believes that it
     would take SBA anywhere from 30 to 60 days to process the same
     loan.  He indicated that he could not offer 7(a) loans and
     compete in the marketplace if SBA's processing takes longer than
     his own bank's.  Another lender representative, who recently
     made his bank's first 7(a) loan, described the program's
     paperwork as "horrendous and unbelievable." This representative
     said that it took him almost a year to close the loan and that
     he even had professional assistance with preparing all the
     paperwork.  A different lender cited the following two examples
     of SBA's excessive paperwork requirements:  (1) Every unmarried
     customer applying for a 7(a) loan must complete the child
     support verification forms,\7 and (2) lenders must obtain
     written verification from the Internal Revenue Service that all
     7(a) loan applicants have filed their tax returns.  He explained
     that this coordination with the Internal Revenue Service adds
     time to the loan process and that customers simply do not want
     to wait 5 to 6 months to have their loan approved.  The lender
     maintained that all of SBA's paperwork requirements imply that
     banks do not know their customers and would make risky SBA
     loans. 

  -- There is a lack of demand for small business loans.  Seven of
     the representatives stated that they serve communities that do
     not have a lot of demand for small business or 7(a) loans. 
     These seven lenders were located in rural, residential, farming,
     and tourist communities, which have had a limited number of new
     businesses start up.  One lender representative believes that
     the lack of demand for small business or 7(a) loans at his bank
     stems from having to compete with 11 other financial
     institutions that have 17 branches in their 10,000-resident
     tourist community. 

  -- The lender lacks experience with 7(a) loans.  Seven of the
     representatives said they had no experience with 7(a) loans and
     had neither the staff nor the expertise to participate in the
     program.  Moreover, these representatives did not have
     commercial loan departments and thus were not structured to
     participate in the program.  One lender representative reported
     that his loan officers did not know anything about SBA loans or
     whom to contact at SBA to obtain this information.  He also said
     that his loan officers were too busy to pursue the program
     because they had other duties and responsibilities that had
     higher priority.  Another lender representative said that his
     bank refers customers who qualify for 7(a) loans to other
     lenders who are knowledgeable of SBA's loan-processing
     procedures and documentation. 

  -- 7(a) loan terms are not favorable.  Three of the representatives
     noted that the fees and interest rates for 7(a) loans are higher
     than the banks' own fees and rates for small business loans.  In
     addition, one lender representative indicated that SBA's loan
     program is expensive for the borrowers because the bank passes
     the guaranty fee on to them.  For example, this bank is just
     about to issue its first SBA 7(a) loan totaling $488,000; the
     borrower's fees for this loan are approximately $10,000. 


--------------------
\7 This is a legislatively mandated requirement pursuant to section
4(f) of the Small Business Act (P.L.  103-403, Oct.  22, 1994). 


SCOPE AND METHODOLOGY
=========================================================== Appendix v

Our objectives required comparing a number of relevant
characteristics for 7(a) loans and borrowers and non-7(a) loans and
borrowers.  Because we were not always able to obtain data
specifically on non-7(a) loans, we used other available sources of
data.  We did not attempt to determine the reasons for similarities
or differences between the 7(a) and non-7(a) loans and borrowers. 
This appendix provides a detailed description of our methodology. 
Each of our data sources is listed in table V.1 below and described
in the following sections, including the major assumptions and
limitations inherent in their use in this report.  This appendix also
describes our approach in identifying reasons affecting lenders'
decisions to participate or not to participate in the 7(a) program. 



                                    Table V.1
                     
                      Data Sources for Comparing 7(a), Non-
                      7(a), and General Small Business Loans
                                  and Borrowers

                                        Comparison data     Figures and tables
Topic               7(a) data source    source              using these data
------------------  ------------------  ------------------  --------------------
Outstanding number  SBA's Office of     Consolidated        Figures II.1 and
and amount of 7(a)  Information         Reports of          II.2
and general small   Resources           Condition and
business loans (as  Management          Income (Call
of June 30, 1995)                       Reports) and
                                        Thrift Financial
                                        Reports

7(a) and non-7(a)   SBA's management    1993 National       Figures II.3 through
loans'              information         Survey of Small     II.5
characteristics     database            Business Finances
                                        (NSSBF)

7(a) and general    SBA's management    Federal Reserve's   Figures II.6 through
small business      information         Survey of Terms of  II.9
loans' maturities   database            Bank Lending,
and interest rates                      published
                                        quarterly

7(a) and non-7(a)   SBA's management    NSSBF               Figures III.1
borrowers' and      information                             through III.7; table
firms'              database                                III.1
characteristics

Sales and assets    Sample of SBA's     NSSBF               Appendix III,
of 7(a) and non-    files located in                        discussion of
7(a) firms          loan servicing                          business
                    centers in Fresno,                      characteristics
                    CA, and Little
                    Rock, AK
--------------------------------------------------------------------------------
Because these data sets covered different periods of time, we made
adjustments to ensure that the various comparisons covered comparable
time frames.  For example, we used a subset of SBA's 7(a) data
spanning fiscal year 1991 through fiscal year 1993 to compare to the
data from the NSSBF.  In addition, we converted the Federal Reserve's
statistical releases from a calendar-year basis to a fiscal-year
basis. 

Although each of the sources in table V.1 provides information on
small business loans, none is a perfect representation of the general
population of small business loans.  The sample from NSSBF is
representative of only small businesses that applied for and received
credit in the past 3 years, not the general population of small
businesses.  The data from Call Reports and Thrift Financial Reports
are representative of only small commercial and industrial and
commercial real estate loans outstanding on the books of depository
institutions at a point in time.  The Survey provides information on
new commercial and industrial loans made by commercial banks, but not
on outstanding loans; it also does not include real estate or other
types of loans to businesses. 


   OUTSTANDING LOANS AND AMOUNTS
   AS OF JUNE 30, 1995
--------------------------------------------------------- Appendix v:1

Our data for outstanding small business loans in general, including
both the number and amount of outstanding loans, are based on
information reported annually by U.S.  commercial banks and insured
savings institutions to their appropriate bank regulator.  These data
are consolidated and maintained in a database at FDIC.\1 We used data
reported as of June 30, 1995.  The combined data are an estimate of
commercial and industrial loans and nonfarm nonresidential loans
extended to small businesses by U.S.  commercial banks and savings
institutions.\2

The number and amount of these loans are grouped by the following
three size categories--"$100,000 or less,"\3 "$100,001 to $250,000,"
and "$250,001 to $1,000,000."\4 We requested that SBA provide the
same type of information in the same size categories for the number
and amount of outstanding 7(a) loans as of June 30, 1995. 


--------------------
\1 U.S.  depository institutions are required by federal law to file
detailed information in quarterly Call Reports or Thrift Financial
Reports.  Beginning in June 1993, these institutions have been
required to include in their June reports information on the
outstanding number and amount of small business loans.  For the
purposes of the Call and Thrift reports, a small business loan is
defined as a commercial and industrial loan or a nonfarm
nonresidential loan for which the original amount was $1 million or
less.  "Original amount" is defined as the total amount of the loan
at origination or, for loans made under lines of credit, the size of
the line of credit or loan commitment when either was granted. 

\2 Our data do not include loans secured by farmland or agricultural
loans. 

\3 Institutions filing Call and Thrift reports are not required to
submit information on loans under $1,000.  SBA's 7(a) data contained
three loans under $1,000. 

\4 Because these are small business loans in general, they include a
small portion of 7(a) loans.  For outstanding loans of $1 million or
less as of June 30, 1995, 7(a) loan dollars accounted for about 6.7
percent of all commercial and industrial, and nonfarm nonresidential
loans reported by U.S.  commercial banks and insured savings
institutions. 


   CHARACTERISTICS OF LOANS AND
   BORROWERS
--------------------------------------------------------- Appendix v:2

Unless noted otherwise, the comparisons of 7(a) and non-7(a)\5 loans
and borrowers were based on data obtained from two sources:  (1)
SBA's management information database (for information used to
describe 7(a) loans and borrowers) and (2) the NSSBF (for information
used to describe non-7(a) loans and borrowers). 

SBA provided us with 162,382 records from its management information
system, which contained information on all loans approved in fiscal
years 1991 through 1995.  SBA's data included information on a small
number of loans greater than $1 million (1,679 records).  We
eliminated these records from our analyses because the comparison
data sets did not include loans over $1 million.  This reduced the
number of SBA's records to 160,703.  The total number of records in
our analysis of SBA's data was further reduced as noted below.  SBA's
data included information describing the loan--such as the state in
which the money was to be used, the loan's approved amount and date,
the subprogram,\6

the guaranteed proportion of the loan, the interest rate, and the
maturity.  The data also included information on the borrower and
firm--such as the ethnicity and gender of the principal owner(s), the
type of business organization, the number of employees, the standard
industrial classification code (SIC), and the firm's status as new
(less than 180 days old) or not. 

Information from the NSSBF was used as a proxy for non-7(a)
borrowers.\7 The NSSBF, which was cosponsored by the Federal Reserve
Board of Governors and SBA, collected data through interviews
conducted in 1994 and early 1995 with 5,356 firms that were selected
to provide a representative sample of all small businesses in the
United States.\8 The main purpose of the NSSBF was to provide
information on the use of credit by small and minority-owned firms
and to create a general-purpose database on the finances of such
firms.  Because of the time period of the data collection effort, the
data were current as of 1993. 

At the time of our study, data from the 1993 NSSBF had not yet been
published, but the Federal Reserve Board of Governors provided us
with preliminary data for 1,811 small businesses that applied for and
obtained credit in the last 3 years.  This group of small businesses
constitutes a subset of the total set of sample respondents of 5,356
firms.  The Federal Reserve provided the sampling weights for each of
these cases to enable us to weight the observations to their
population values.  However, the data from the NSSBF were
preliminary, and the methodology report for the survey had not been
finalized at the time we performed our analyses.  Consequently, we
did not have the details of the design of the survey sample, the
survey's implementation and response rates, and information regarding
the handling of missing data.  Because estimating the survey's
sampling errors would have required making various assumptions, we
therefore did not calculate the sampling errors associated with the
NSSBF's data.  The NSSBF's data were based on a sample, and a
measurable precision is associated with each estimate, but without
the sampling errors (described in more detail later), great care
should be taken when comparing estimates for non-7(a) businesses and
7(a) businesses. 

The differences in the data from these two sources had to be
reconciled to facilitate comparisons.  The adjustments are described
below. 


--------------------
\5 The comparisons between 7(a) and non-7(a) are not restricted to
SBA programs.  For example, data describing non-7(a) could include
loans under other SBA programs as well as conventional small business
loans. 

\6 Under the 7(a) program, SBA operates a number of subprograms, such
as those intended to assist companies engaged in exporting, firms
seeking loans in amounts up to $100,000, and firms seeking lines of
credit. 

\7 According to Financial Services Used by Small Businesses: 
Evidence From the 1993 National Survey of Small Business Finances,
0.53 percent of small businesses indicated that the government was
the supplier of their financial services.  Federal Reserve staff
noted that this percentage may understate the incidence of 7(a) loans
because, among other reasons, some respondents may have been unaware
that they received an SBA-guaranteed loan. 

\8 The NSSBF initially selected 15,714 firms, of which 10,141 passed
to the main questionnaire stage.  Interviews were completed for 5,356
of the firms, or about 50 percent. 


      GEOGRAPHIC INFORMATION
------------------------------------------------------- Appendix v:2.1

The only geographic information in the NSSBF's data was the census
region in which the firm was located.\9 The state listed in SBA's
data was used to group the 7(a) data according to census regions.  We
excluded 3,434 records--for borrowers from Guam, Puerto Rico, and the
Virgin Islands with loans of $1 million or less--from all analyses of
SBA's data.  This further reduced the overall number of SBA's records
to 157,269. 


--------------------
\9 The Bureau of Census organizes the 50 states into nine regions, as
follows:  (1) East North Central (composed of Ohio, Indiana,
Illinois, Michigan, and Wisconsin), (2) East South Central (Kentucky,
Tennessee, Alabama, and Mississippi), (3) Middle Atlantic (New York,
New Jersey, and Pennsylvania), (4) Mountain (Montana, Idaho, Wyoming,
Colorado, New Mexico, Arizona, Utah, and Nevada), (5) New England
(Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, and
Connecticut), (6) Pacific (Washington, Oregon, California, Alaska,
and Hawaii), (7) South Atlantic (Delaware, Maryland, District of
Columbia, Virginia, West Virginia, North Carolina, South Carolina,
Georgia, and Florida), (8) West North Central (Minnesota, Iowa,
Missouri, North Dakota, South Dakota, Nebraska, and Kansas), and (9)
West South Central (Arkansas, Louisiana, Oklahoma, and Texas). 


      BUSINESS ORGANIZATION
------------------------------------------------------- Appendix v:2.2

SBA's data included three organizational types--individual (or sole
proprietorship), partnership, and corporation.  The NSSBF included
four organization types--proprietorship, partnership, S corporation,
and C corporation.\10 We combined the two types of corporations in
the NSSBF's data to provide comparable information. 


--------------------
\10 According to Financial Services Used by Small Businesses, from a
legal and financial viewpoint, a sole proprietor and his or her
company are one.  The income of the company flows directly to the
proprietor, and the proprietor is responsible for all liabilities of
the company.  A partnership is a legal relationship between two or
more persons for the purpose of conducting business as joint
principals.  Income goes directly to the partners and is taxed only
at the personal level.  Like a sole proprietor, partners are
responsible for the firm's liabilities.  Two primary types of
corporations exist:  C and S.  The income of a C corporation is
subject to the corporate tax, whereas the income from an S
corporation is not.  However, the ownership of an S corporation
carries several restrictions--such as those on the number of
shareholders and on the number of different classes of stock--that do
not apply to a C corporation.  Hence the "S form" applies primarily
for small businesses. 


      NUMBER OF EMPLOYEES
------------------------------------------------------- Appendix v:2.3

The number of employees in SBA's data is the number as provided by
the prospective borrower at the time of loan approval.  No specific
guidance is given to elicit the number of full-time and/or part-time
employees.  According to SBA, the number of employees in SBA's data
is required as part of the application recording process, so any
zeros in this field should be treated as missing values.  Therefore,
we excluded 167 such values from any analysis of the number of
employees. 

The NSSBF's data included information on the number of full-time
employees and the number of part-time employees.  We chose to use two
different numbers--(1) the number of full-time employees and (2) the
sum of the number of full-time and part-time employees--in our
comparison because of the lack of specificity in SBA's data.  The
NSSBF's data contained zero full-time employees in 3.9 percent of the
cases, and no cases with zero once full- and part-time employees were
combined.  All cases specifying zero were eliminated in the analyses
of the number of employees. 


      STANDARD INDUSTRIAL
      CLASSIFICATION CODES
------------------------------------------------------- Appendix v:2.4

SBA's data included four-digit SIC codes, and the NSSBF's data
included two-digit SIC codes.  We used only the first two digits of
SBA's SIC codes to ensure comparability.  To facilitate our analysis
of the SIC codes, we aggregated the two-digit codes into the
divisions described in the Standard Industrial Classification Manual,
1987.\11 The divisions described in the Manual did not assign all
possible two-digit SIC codes to a division.  Because of this, our
assignment of two-digit SIC codes to these divisions left some
unassigned codes, which were grouped into an "Other" category.  The
unassigned SIC codes constituted 0.2 percent of the 7(a) firms and
9.7 percent of the non-7(a) firms. 


--------------------
\11 The SIC code divisions are A for agriculture, forestry, and
fishing; B for mining; C for construction; D for manufacturing; E for
transportation, communications, electric, gas, and sanitary services;
F for wholesale trade; G for retail trade; H for finance, insurance,
and real estate; I for services; J for public administration; and K
for nonclassifiable establishments. 


      ETHNICITY
------------------------------------------------------- Appendix v:2.5

SBA's data included the following categories:  African-American,
Puerto Rican, American Indian, Hispanic, Asian or Pacific Islander,
Eskimo or Aleut, Undetermined,\12 White, and Multigroup.\13 There is
no overlap between any of these ethnic categories.  We excluded 102
records from any analysis of ethnicity because of missing
information. 

The NSSBF's data included two data fields related to race and
ethnicity.  The first field designated whether a firm's ownership was
more than 50 percent Hispanic, less than 50 percent Hispanic, or
exactly 50 percent Hispanic.  The second designated what minority
race(s) owned more than 50 percent of the firm--African-American,
Asian or Pacific Islander, American Indian or Alaskan Native, and
multiple or mixed.  Skipping this field indicated that no minority
race(s) owned more than 50 percent of the firm--in other words, that
more than 50 percent of the firm was owned by Whites. 

We recoded both data sets to provide comparable ethnic coding.  We
recoded SBA's data into the following categories:  African-American,
Hispanic (combining Puerto Rican and Hispanic), American Indian or
Alaskan Native (combining American Indian and Eskimo or Aleut), Asian
or Pacific Islander, Undetermined, White, and Multigroup.  For
consistency with our earlier report, we combined the last three
groups into an "Other" category.\14

We combined the NSSBF's data fields on race and ethnicity to create a
new category.  All records coded as 50 percent or greater Hispanic
were assigned the new ethnic category "Hispanic," regardless of race. 
All records coded as less than 50 percent Hispanic were assigned new
ethnic categories using the data describing race as follows: 
African-American, Asian or Pacific Islander, American Indian or
Alaskan Native, Multigroup, and White. 


--------------------
\12 The "Undetermined" category constituted 1.4 percent of the 7(a)
firms. 

\13 The "Multigroup" designation applies only to minority enterprises
in which at least 51 percent of the owners are from minority
categories, but each individual minority category accounts for less
than 51 percent.  This group constituted 0.2 percent of the 7(a)
firms. 

\14 The data provided by SBA that we used for analysis in Trends in
SBA's 7(a) Program (GAO/RCED-96-158, June 10, 1996) included an
ethnic category of "Other," which combined three categories:  White,
Multigroup, and Undetermined.  For consistency, we adopted the same
grouping in the current report. 


      GENDER
------------------------------------------------------- Appendix v:2.6

SBA's data included information on the gender of the principal owner. 
According to SBA, this field is used to identify businesses that are
at least 51 percent owned by one or more women.  The NSSBF's data had
information designating whether more than 50 percent, less than 50
percent, or exactly 50 percent of the firm was owned by women.  We
combined the groups of less than 50-percent and exactly 50-percent
female ownership to indicate that the firm did not have female
ownership. 


      LINE OF CREDIT
------------------------------------------------------- Appendix v:2.7

SBA's data included a subprogram code.  Because some of these involve
providing lines of credit while others do not, we recoded this
information to reflect whether or not the subprogram code related to
a line of credit.  The NSSBF's data included a variable that
specified whether or not the firm had most recently applied for a
line of credit. 


      STATUS AS A NEW BUSINESS
------------------------------------------------------- Appendix v:2.8

SBA's data included information indicating whether or not the
business was new, which SBA defines as being no older than 180 days
(or 6 months).  The NSSBF's data included information on the age of
the firm in years; we considered a business as new if its age was 1
year or less.\15


--------------------
\15 We attempted to recode the NSSBF's data using an age of 0.5 years
or less as the definition of a new business, but 0.0 percent of the
businesses were identified as new using this definition.  Therefore,
we increased the time period defining the age of a new business to 1
year or less. 


   LOAN MATURITIES AND INTEREST
   RATES
--------------------------------------------------------- Appendix v:3

SBA's management information data included information on fixed and
variable interest rates and loan maturities in months, which we
converted to years.  We used the loan approval date to calculate the
fiscal year and quarter in which each loan was approved.  Using this
information, we calculated mean values, weighted by the approval
amounts, for the interest rates and maturities of fixed-rate and
variable-rate loans.  The maturities for 7(a) loans were under 1 year
in 1.6 percent of the cases and 1 year and over in 98.4 percent of
the cases.  We eliminated 2,483 SBA loans with maturities under 1
year from the analyses of interest rates and maturities for
comparability with the Survey of Terms of Bank Lending. 

The subset of the NSSBF's data provided to us contained no
information on interest rates and maturities.  The NSSBF collected
information on maturities and interest rates, but according to staff
at the Federal Reserve, as of August 1996, the data had not been
processed.  For comparable information on small business loans in
general, we used data from the Federal Reserve's statistical release
Survey of Terms of Bank Lending for commercial and industrial loans
made by commercial banks for each quarter of fiscal year 1991 through
fiscal year 1995.\16 We used this source for our comparison because
it was the only available source of this type of data.  Loans
captured in the Survey could have been made to any size business. 
However, available research shows that small loans are likely to be
to small businesses.  Throughout the report, we refer to data from
the Survey as describing general small business loans.  We used
information from the statistical releases--which cover 1 week in the
middle month of each quarter--as a rough proxy for the quarter.  This
is a limitation that should be considered when reviewing our
comparisons. 

The Survey of Terms of Bank Lending provides information on loans
with maturities of 1 year and over in three size categories under $1
million (less than $100,000,\17 between $100,000 and $499,999, and
between $500,000 and $999,999).  The percentages of 7(a) loans in
these categories were 40.9, 49.5, and 9.5 percent, respectively.  We
focused our analysis on the first two categories because they
accounted for 90.5 percent of 7(a) loans.\18 In general, commercial
loans with maturities of 1 year and over are more likely to have
variable rather than fixed interest rates. 


--------------------
\16 Through the Survey of Terms of Bank Lending, the Federal Reserve
Board of Governors collects data on gross loan extensions made during
the first full business week in the middle month of each quarter by a
sample of 340 commercial banks of all sizes.  The sample data are
used to estimate the terms of loans extended during that week at all
insured commercial banks.  The Survey notes that the estimated terms
of bank lending are not intended for use in collecting the terms of
loans extended over the entire quarter or residing in the portfolios
of those banks. 

\17 The Survey does not include information on loans under $1,000. 

\18 The percentages of SBA's 7(a) loan dollars in these categories
were 11.0, 56.3, and 32.7 percent, respectively.  We focused our
analysis on the number of loans rather than the loan dollars. 


   SALES AND ASSETS
--------------------------------------------------------- Appendix v:4

Using SBA's management information data, we determined the portion of
7(a) loans approved in fiscal year 1993 that listed SBA's centralized
commercial 7(a) loan-servicing centers in Little Rock, Arkansas, or
Fresno, California, as the current loan-servicing office:  18.2 and
21.2 percent, respectively.\19

We collected the sales and assets data from the files of a random
sample of loans stratified by the two locations.  We sampled 375 out
of 5,230 cases in Little Rock and 395 out of 6,097 cases in Fresno. 
We were unable to collect information on 28 and 34 of the selected
cases in Little Rock and Fresno, respectively, primarily because the
records were either missing or in use in other locations.  Therefore,
our results apply to an estimated universe of 4,826 loans at Little
Rock and 5,572 loans at Fresno. 

Because we used a probability sample of loans to develop our
estimates of the sales and assets of 7(a) firms whose loans were
serviced at Little Rock and at Fresno, each estimate has a measurable
precision, or sampling error, which may be expressed as a plus/minus
figure.  A sampling error indicates how closely we can reproduce from
a sample the results that we would obtain if we were to take a
complete count of the universe, using the same measurement methods. 
By adding the sampling error to and subtracting it from the estimate,
we can develop upper and lower bounds for each estimate.  The range
is called a confidence interval.  Sampling errors and confidence
intervals are stated at a certain confidence level--in this case, 95
percent.  For example, a confidence interval at the 95-percent
confidence level means that in 95 out of 100 instances, the sampling
procedure we used would produce a confidence interval containing the
universe value we are estimating.  The confidence intervals for our
estimates are contained in footnotes 3 and 4 of appendix III. 

The NSSBF's data contained 1992 sales and assets data for a sample of
firms.  The Federal Reserve Board of Governors' staff notified us
that the NSSBF collected sales and assets data as they appeared on
the firms' balance sheets on December 31, 1992, since some firms had
not completed filing their 1993 tax forms at the time of the survey. 
Also, staff of the Federal Reserve notified us that the sales and
assets data had not been edited for logical consistency at the time
it was provided to us and should be used accordingly.  In addition,
the sampling error associated with each estimate made from this
sample is not known.  Therefore, great caution should be exercised
when reviewing all comparisons of data on 7(a) and non-7(a) firms'
sales and assets. 


--------------------
\19 Our sampling unit was loans, but Little Rock and Fresno accounted
for 18.4 and 24.5 percent, respectively, of the loan dollars approved
in fiscal year 1993. 


   SELECTION OF LENDERS FOR
   TELEPHONE SURVEYS
--------------------------------------------------------- Appendix v:5

To obtain a range of views about participation in the 7(a) program,
we identified lenders that had generated a high volume and a low
volume of 7(a) loans and lenders that had not participated in the
program. 


      HIGH-VOLUME LENDERS
------------------------------------------------------- Appendix v:5.1

Using the same data provided to us from its management information
system, SBA determined the top 500 lenders, as indicated by the
number of 7(a) loans approved by each lender in fiscal year 1995. 
SBA provided us with data on each of these 500 firms, including the
name and address of the parent financial institution, as well as the
number and amount of loans approved in fiscal years 1991 through
1995. 

We randomly selected 40 financial institutions from the top 250
institutions on this list.  Financial institutions were dropped from
the sample if they were nonbank entities, were located outside the
continental United States, no longer existed (because of mergers), or
were no longer participating in the 7(a) program or if we could not
obtain accurate telephone listings for them.  Of the 40 lenders in
our original random sample, 19 were dropped for these reasons.  We
conducted telephone interviews with the remaining 21 using a
structured interview guide. 

In developing our structured interview for the high-volume lenders,
we obtained input from four lenders to determine factors that
contribute to a lender's decision to participate in the 7(a) program. 
These lenders were identified by SBA's Dallas District Office as
participating in the program.  Prior to administering the structured
interview guide, we pretested the instrument with three lenders,
which we selected from the list of 500 high-volume lenders.  Once
pretesting was complete, we administered the structured interview to
the 21 lenders:  3 in California, 1 in Colorado, 3 in Florida, 3 in
Georgia, 1 in Illinois, 1 in Iowa, 1 in Mississippi, 1 in Montana, 1
in New Jersey, 1 in Pennsylvania, 1 in South Dakota, 2 in Texas, 1 in
Vermont, and 1 in Virginia. 


      LOW-VOLUME LENDERS
------------------------------------------------------- Appendix v:5.2

Using data from SBA's management information system, we generated a
list of the 1,000 lenders with the fewest 7(a) loans in fiscal year
1995.  SBA provided us with the names and addresses of these 1,000
low-volume lenders. 

Using this list, we selected a judgmental sample of 17 lenders from
five states that are among the most active in the 7(a) program and
that provided some geographic dispersion.  The five states selected
were California (which accounted for 13.2 percent of the 7(a) loans
from fiscal year 1991 through fiscal year 1995), Texas (10.3
percent), New York (6.1 percent), Illinois (3.2 percent), and Florida
(3.1 percent).  We conducted telephone interviews with 17 lenders
using a structured interview guide. 

In developing our structured interview for the low-volume lenders, we
obtained input from 5 of the 1,000 lenders to determine factors that
contribute to a lender's decision to participate in the 7(a) program. 
Because the structured interview guide for the low-volume lenders was
very similar to the guide for the high-volume lenders, we pretested
the instrument with only one lender.  Subsequently, we administered
the structured interview guide to the 17 lenders:  3 in California, 3
in Texas, 3 in New York, 4 in Illinois, and 4 in Florida. 


      NONPARTICIPATING LENDERS
------------------------------------------------------- Appendix v:5.3

We also interviewed lenders that do not participate in the 7(a)
program to determine the reasons underlying their lack of
participation.  We wanted these nonparticipating lenders to be
located in the same five states--California, Texas, New York,
Illinois, and Florida--that are active in the 7(a) program. 

Comparing listings of lenders in the Spring 1995 Polk North American
Directory of Financial Institutions and SBA's September 30, 1995,
"Lender's Guaranty Loan Report," we identified nonparticipating
lenders.  We judgmentally selected 23 such lenders from the five
states:  2 in California, 9 in Texas, 4 in New York, 4 in Illinois,
and 4 in Florida. 

We conducted telephone interviews with these 23 lenders and asked why
they did not participate in the 7(a) program.  We recorded their
responses and then categorized them using content analysis. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix vi

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Lawrence J.  Dyckman, Associate Director
David G.  Wood, Assistant Director
Charles E.  Wilson, Jr., Evaluator-in-Charge
Angela Crump-Volcy, Senior Evaluator
Judy K.  Pagano, Senior Operations Research Analyst
SaraAnn W.  Moessbauer, Senior Operations Research Analyst
Annette Wright, Senior Technical Specialist
Jonathan Bachman, Senior Social Science Analyst
Stephen M.  Brown, Senior Economist

DALLAS OFFICE

Luis Escalante, Jr., Senior Evaluator
Sally S.  Moino, Staff Evaluator

OFFICE OF THE GENERAL COUNSEL

John T.  McGrail, Senior Attorney



RELATED GAO PRODUCTS
============================================================ Chapter 0

Trends in SBA's 7(a) Program (GAO/RCED-158R, June 10, 1996). 

Small Business:  Analysis of SBA's Preferred Lenders Program
(GAO/RCED-92-124, May 15, 1992). 

Small Business:  Improving SBA Loan Collateral Liquidations Would
Increase Recoveries (GAO/RCED-92-5, Dec.  19, 1991). 

Small Business:  Financial Condition of SBA's Business Loan Portfolio
Is Improving (GAO/RCED-92-49, Dec.  3, 1991). 

SBA's 7(a) Loan Guarantee Program:  An Assessment of Its Role in the
Financial Market (GAO/RCED-83-96, Apr.  25, 1983). 


*** End of document. ***