The Contribution of Small Business Loan Guarantees to Economic Development

Abstract

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