SBA default rates : Selection bias and credit deterioration

This study estimates the effects of changes in the money and capital markets on small business loan failure rates. It develops a lagged model of the relationship between term structure and risk premium variables and the loan failure rates of the Small Business Administration (SBA). Bank credit availability to small firms is shown to be the key factor in relating changes in economic conditions to changes in the SBA loan failure rates. As bank credit availability changes over an economic cycle, there is a movement of the least risky small firms into and out of the population from which the SBA grants and guarantees loans.