Give ‘Em Credit

Numerous regulatory proposals aim to reverse the ebb in small-business lending. But will any of them actually work?

How can access to capital be improved for small businesses so they can create jobs and accelerate the economic recovery? There is no silver bullet, but President Obama and Congress are floating multiple policy and legislative options to spur small-business lending.

At a House Financial Services Committee hearing last week, bankers and business owners testified that access to credit is still widely constricted for small businesses. The numbers back that up. In the Duke University/CFO Magazine Global Business Outlook Survey for the first quarter of 2010, 60% of executives at companies with less than $25 million in revenue said borrowing is much more difficult today compared with the summer of 2008, before the collapse of Lehman Brothers. By contrast, only 25% of companies in the $1 billion to $4.9 billion revenue range answered that way.

Also, a net 14% of respondents to the latest monthly survey of the National Federation of Independent Business, a small-business association, reported that loans were tougher to get in January than in their previous attempt at applying for a loan.

One proposal by the Obama administration is to take $30 billion of unused TARP money and create a Small Business Lending Fund for banks with less than $10 billion in assets. The amount of capital a bank could receive would be a percentage of its risk-weighted assets. The government would get at least a 5% dividend from the capital investment, but that rate would fall if the bank demonstrated an increase in small-business lending compared with a 2009 baseline. For every 2.5% increase in incremental business lending over a two-year period, the dividend rate would fall one percentage point. After five years, the dividend rate would increase to encourage timely repayment.

But the stigma associated with taking TARP money would discourage banks from using the fund, claimed some witnesses at last Friday’s hearing. Bank of Alameda CEO Stephen G. Andrews, testifying on behalf of the Independent Community Bankers of America, said the fund would have to avoid some of the entanglements that arose with the TARP’s Capital Purchase Program, in particular the issuance of stock warrants to the government and restrictions on banks’ compensation and dividends.

House Small Business Committee Chairman Rep. Nydia Velázquez (D-N.Y.) was also critical of the idea, saying that “taking $30 billion and simply handing it to banks in the hopes that they will make loans is not sound policy.” Instead, Velázquez wants the $30 billion sent to the Small Business Administration for development of a direct-lending program. But the SBA’s own administrator, Karen Mills, admitted that the agency has neither the expertise nor the infrastructure to lend directly to small businesses, and said that those businesses would be better served if the government just improved its loan programs already in place.

The SBA and the administration want to boost the volume of government-backed SBA loans for working capital, the so-called 7(a) loan program, by permanently increasing the maximum size of a 7(a) loan from $2 million to $5 million and by continuing to temporarily guarantee 90% of each loan and waive borrower fees. The latter two measures were instituted last year under the American Recovery and Reinvestment Act.


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