Nº 22-31: The Impact of the SBA Funding Programs on the Distance and Pricing of Loans to Small Businesses

We model and test spatial price discrimination in Small Business Administration (SBA) 7(a) loans, where a federal guaranty neutralizes loan-specific risk. The SBA distinguishes between Preferred Lender (PLP) and non-PLP banks. While PLP take credit decisions on loan applications, the SBA takes the decisions for non-PLP. Our model predicts that only PLP banks charge nearby-firms higher rates than distant firms by appropriating the firms’ transportation savings from visiting rival banks. We find evidence consistent with this prediction. Further, while SBA’s technological improvements, starting in 2014, increase overall lending distance, PLP spatial pricing worsens.