Will Banks Increase Small Biz Lending?

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President Obama took to the road recently to tout a new initiative that would encourage — or maybe twist a few arms is more appropriate — banks to lend money to small businesses. What’s the plan and how can entrepreneurs get in on the action?

Essentially, the White House plan is to divert $30 billion in Troubled Asset Relief Program (TARP) money to a new government program that would funnel loans to small businesses. The program will be called the Small Business Lending Fund, and will reportedly favor smaller, community banks that tend to lend money to small businesses at a greater frequency than larger banks.

According to a White House statement, the program will target banks with assets of $10 billion or less. According to the U.S. Treasury Department, banks in that category account for more than 50% of all small business loans in the U.S., even though they only comprise less than 20% of all U.S. bank assets.

Here’s a thumbnail look at what the new $30 billion small business lending programs entails:

  • Targeted at community and smaller banks that lend the most to small businesses.
  • Established separately from TARP to encourage maximum participation.
  • Core proposal for a new fund would be to offer capital investments with incentive for banks to increase small business lending.
  • Administration will discuss with Congress additional ideas to enhance credit for small businesses through the small business lending fund.

The White House is also proposing a $5,000-per-worker tax credit for businesses that hire new workers, and wants to reimburse businesses for Social Security taxes they pay on workers, to be capped at a maximum of $500,000 per company.

The program is by no means a done deal. Congress needs to approve the new proposal, and some legislators feel that TARP funds should be used to pare down the federal deficit, and not be handed out to small businesses. But advocates say the $30 billion will kick-start hiring among U.S. small businesses — and studies show that small businesses are far and away the biggest engine for job growth.

Right now, the jobless rate is at 9.7%, and many economists believe that number is low (it doesn’t account for part-time workers, people who stopped looking for work and freelancers and consultants who don’t show up in the U.S. Bureau of Labor Statistics employment calculations.)

Then there is the bank issue. No matter how hard the government pushes, lending to small businesses is down significantly. According to a study by the U.S. Treasury Department, the nation's largest banks slashed their small business lending balance by $1 billion in November 2009. That marks the seventh straight month of declines in small business lending.

Will the proposals help small businesses? Sure, increased access to loans and tax breaks could spur hiring and get some small businesses back on their feet. But the reality is that small businesses have suffered too much damage from the Great Recession for the new government programs to have a major impact.

It’s really a Catch 22. Businesses need consumers to spend. But with at least 10% of the workforce on the sidelines, consumer spending is weak. The only way out is for businesses to hire new workers, which would pour more money into the economy.

As big as the federal government is becoming, there’s no program that can turn that scenario into reality.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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