Can Obama Jolt Small Business Lending?

The Administration offers a package of help for small businesses, but the program carries some risks for Uncle Sam

By Jane Sasseen

In a move that took even some of his allies by surprise with the timing, President Barack Obama on Mar. 16 unveiled a package of measures aimed at boosting lending to small business by freeing up the frozen markets for credit that serve the nation's entrepreneurs.

With Treasury Secretary Timothy Geithner by his side, Obama told roughly 200 small businesses representatives gathered in the East Room of the White House that he would commit $15 billion from the Troubled Asset Relief Program (TARP) so that the government can purchase loans backed by the Small Business Administration from the banks that have originated them. The moves come on top of earlier Administration efforts to ease the strains on small business lending. As part of the stimulus package, the government agreed to increase the guarantee it provides to banks on SBA-backed loans from the current 75% to 90%, as well as temporarily reducing some fees linked to Small Business Adminstration loans.

The idea behind the moves? To get the once vibrant secondary market for SBA-backed loans going again. President Obama told the assembled crowd that he had come to realize that without an additional boost to get the securitization market started, the earlier measures to increase lending wouldn't be enough.

New Reporting Requirements

As with other parts of the financial sector, the secondary market for SBA-backed loans has shrunk to a fraction of its former size. That's meant many banks have been forced to keep earlier loans on their books. As a result, they don't have new capital with which to make new loans. By buying up many of those loans from current lenders, the Administration hopes to free up capital so the banks can make new loans to small businesses.

Now, the President said, "any lender that provides SBA small business loans will have a buyer for those loans."

But it's not all carrot: The day's event came with a mild stick as well. Geithner also announced that Treasury will increase the reporting requirements on banks to tabulate the lending they offer to small business. The top 21 banks receiving federal funds will now be required to report their lending to small businesses on a monthly basis, and Geithner said he will push bank regulators to require the rest of the banking system to provide quarterly reports on small business lending. The hope is clearly that more public scrutiny of their records will lead to more lending; the threat, just as clearly, is that they will be made to do so if they don't improve small business lending voluntarily.

"I want to deliver a clear message to our nation's banks," Geithner said before the President spoke. "The government of the United States has put in place extraordinary protections for the banking system … so that they have access to the liquidity they need. We need you to put that assistance to work for the American economy."

Scoring Political Points

Small business owners and their representatives were clearly happy with the moves.

"There were two things I liked: the help for the securitization markets, and the President's call to make the banks report how much lending they are doing," said Keith Ashmus, a Cleveland-based attorney and chairman of the National Small Business Assn. "We are seeing business after business with a history of promptly paying their bills just get their credit lines canceled." The new moves should help ameliorate some of those pressures, he added.

Congressional allies were also quick to back the measures. "The financial crisis has hit small businesses where it hurts the most—drying up access to capital as banks are becoming more hesitant to lend," said Senator Mary Landrieu (D-La.), chair of the Senate Small Business and Entrepreneurship Committee. While the frozen secondary market for SBA-backed loans has discouraged new lending to small businesses, the Administration's plan "will allow banks to leverage existing SBA loans to provide new loans to entrepreneurs looking to grow and create more jobs."