Senate Clears Way for $30 Billion Small Business Fund

Posted by: John Tozzi on July 23, 2010

Washington is poised to launch its most direct attempt to revive small business lending since the financial crisis with a plan to invest up to $30 billion of federal money in small banks and give them incentives to re-lend that money to Main Street companies.

The Small Business Lending Fund, outlined by President Obama in his State of the Union speech six months ago, cleared a key Senate vote to end debate July 22 as two Republicans broke with their caucus to support the measure.

The full bill, which includes business tax breaks and enhancements to Small Business Administration loan programs, could come to a vote as soon as July 27, according to Richard Carbo, spokesman for the Senate Committee on Small Business. The House passed a version June 18.

The fund would invest in small banks—those with less than $10 billion in assets—by purchasing preferred stock, which would pay the government a dividend of 5 percent. The cost of that money would decrease to a dividend as small as 1 percent if banks boost their small business loans over 2009 levels by 10 percent. For banks that do not increase their small business lending, the capital would become more expensive, with the dividend rising to 7 percent.

Bank lending to small businesses has dropped to $670 billion from $710 billion since 2008, according to data filed with regulators. Obama and Federal Reserve Chairman Ben Bernanke have connected the drop in small business credit to weak job growth and urged banks to increase the flow of loans to creditworthy businesses. “The formation and growth of small businesses depends critically on access to credit,” Bernanke told a forum on small business July 12. “Unfortunately, those businesses report that credit conditions remain very difficult.”

Banks say lending is down because fewer companies want to take on debt and fewer borrowers are good credit risks. “Loan demand has fallen dramatically since the start of the recession,” the American Bankers Association noted in a recent fact sheet. The lobby group supports the Small Business Lending Fund.

Analysts like Raj Date question whether the money will be effective, however. Date, a former managing director at Deutsche Bank who now runs the Washington research group Cambridge Winter Center, calls the program “well-intentioned” but says it won’t work as well as lawmakers claim. While the bill’s authors say the $30 billion in federal money invested in banks would spur $300 billion in private lending to businesses, Date estimates that the Small Business Lending Fund would support only $70 billion in new credit. Banks will use most of the money to cover losses on existing commercial real estate loans, he says.

“The amount of help is relatively small to the size of the problem,” he says in an interview with Bloomberg Businessweek. Date also says that taking government money will be most attractive to the banks in the most trouble. Originally conceived as a part of the Troubled Asset Relief Program, the Small Business Lending Fund was separated from TARP to avoid discouraging banks from participating because of restrictions and the stigma associated with the bailout.

Republicans opposed the measure on the grounds that it mirrors the Troubled Asset Relief Program and “injects capital into banks with no guarantees they will actually lend,” according to a policy statement. Senate Small Business Committee Chair Mary Landrieu (D-La.) said in a statement that the bill has strong protections for taxpayer money and is expected to raise $1.1 billion in dividend income over 10 years.

The bill includes other provisions intended to aid small businesses such as $11.7 billion in tax breaks on things like investing in new equipment or the sale of small business stock. The SBA provisions would increase the limits on government-guaranteed loans to $5 million from $2 million, and extend the reduced fees and higher guarantees passed last year in the stimulus bill. The law would also allow self-employed workers to fully write off their health insurance costs in 2010.

Reader Comments

Robert Nguyen

July 23, 2010 5:32 PM

Money well invested to get the economy back on track - all must be done to prevent a self inflicted recurred recession.

Lee Smith

July 23, 2010 7:31 PM

Without an explicit guarantee that money injected into banks will be lent to worthy businesses that cannot get loans today, this Program will be completely useless to the small business owner. I am sure, however, small businesses will be taxed to pay for this Program regardless of its success or likely failure. Why not use the money for NEW SBA guarantees applying NEW criteria reflecting today's difficult market? If it works, then allocate more funds for additional NEW guarantees.

small lender

July 23, 2010 8:41 PM

The plan is NOT going to work. The small lenders are not going to lend the money in this economic environment. The Fed should consider giving the money directly to the small businesses.

Joshua Konov

July 24, 2010 6:55 AM

To put additional money to Small Businesses without enhancing their security as borrowers is more alike pouring water into a desert: instead the business, contracting and bonding laws as well personal liability of corporate risk management laws should improved so small businesses would become more lend-able, then after more capital will work its ways around.

ML Thomas

July 25, 2010 9:01 PM

Uhhhhhhhhhh, EXCUSE ME, I seem to recall that a) BANKS and greedy lenders created the problem, b) If they wouldn't load before, WHAT will prompt them to loan now???? Oh, ANOTHER government program, where the small business that NEED the money won't qualify.... Keep up the good work Senators!!

Greg Zwick

July 26, 2010 10:38 AM

You can't "PUSH" loans to small businesses. Most make decisions based on "hurdle rate", the minimum rate of return the owner will take based on an assessment of the economic/business outlook.

That rate is "through the roof" right now because of the uncertainty of the recently passed bills and the economy in general.

The new tax, penalty, reporting, and compliance costs combined with the expiring investment incentives, risks of increasing inflation and interest rates make it extremely unattractive to invest in new employee's to chase growth in a "flat" economy.

chammond

July 26, 2010 10:46 AM

This is a good idea only if the banks don't plunder the kitty with their egregious bonuses!

Loyd Eskildson

July 26, 2010 11:08 AM

We don't need more eg. restaurants and retails stores - neither improve our competitiveness in the global economy, pay well, nor draw upon the skills that recent graduates or laid-off manufacturing and technology workers want to utilize. We instead need to encourage/help the Apples, Intels, etc. to retain their R&D and manufacturing activities in the U.S.

Kathy

July 26, 2010 11:44 AM

more money for us.

Rob

Lou

July 26, 2010 12:56 PM

This will not help Small Business. Any bankable business can get a loan. Most small businesses are not bankable. Banks don't loan money to pay the rent. they loan money to grow. this will be invested in real estate and that means prices will stay high.

Steven

July 26, 2010 1:05 PM

Doesn't anyone seem concerned that the federal government is proposing to take over a section of the banking industry?

I am a small business owner, but this still concerns me. The government is not doing this to temporarily prop up a failing banking system, but rather to force the independent banking system into following a specific political line.

I don't want to sound like a conspiracy theorist, but having the federal government buying into independent banks is, in my opinion, a very dangerous precedent.

Paul Yangas

July 26, 2010 6:11 PM

Sadly so many small businesses are already hurt by the economy of the last 2 years, with overdue bills and stretched balance sheets, that the banks won't be comfortable lending it. It needs to be earmarked for the recovery of previously sound businesses who are having difficulty, with a federal guaranty to the banks.

Andre

July 26, 2010 10:17 PM

Small banks aren't going to lend money to small businesses. If the government wants guarantee lending, it needs to set up a government lending institution.

Ken

July 27, 2010 12:44 PM

How about making it easier for small business to repay these loans. One way to do this is to look at the C Corporation tax brackets that have not changed since 1986. Inflation has cut the economic value of these brackets by 50%. Remember there are only two ways to repay a debt. Borrow the money some where else or with after tax earnings.
Congress talks about small business but I doubt if anyone in congress has ever been lobbied by a real small business interest.

Nate Hagerty

July 27, 2010 12:46 PM

Agreed with Lou. The small business owners are in a real tough spot. This won't help.

Nate

N. Culley

July 27, 2010 1:38 PM

Neil;
This is another joke from Washington. Why would you give the crooks more money and still not help small business. Banks are calling in credit lines on small business men because of heat from the Feds. What a joke this country is becoming.

Eric G.

July 28, 2010 9:05 AM

Small banks were and are not the problem. This is more about Government getting their foot in the door of small banks by buying stock with a 5% dividend. Miss a dividend payment and the government can systematically remove more competition for Citi, BofA, Chase, etc., who, along with the fed and congress, are the real creators of our county's financial problems.

Eric

July 28, 2010 1:36 PM

Let's define the small businesses that really need help, that really represent the most existing and new job creation, and that this program won't likely help.

Those with 50 or fewer employees. The way to get these business what they need is for people to support them. Buy their products. Buy their services. Consider Peer-to-Business (P2B) lending.

Quit waiting for the government or Wall Street to help them out. They just don't understand how, want to or really care.

It's the "Bottom 95%" of income earners who are represented by this group of business. Either because they own a small business or support them.

Time has come for this group to gather as a community and as a community become self reliant.

Bill B.

July 29, 2010 9:50 AM

Eric hit the nail on the head but I'll take it one step further. I think Main Street should take its money out of Wall Street and place it in credit unions and community banks.

This would serve two purposes; (1) it would return money to where it is needed most at present (to local, small businesses) and (2) it would erode the power base in New York and Washington and its corrosive effects.

Thanks but no thanks Congress.

alliantgroup

July 29, 2010 4:22 PM

The Senate is finally considering the small business bill, which only means good things for thousands of small and medium businesses. Read alliantgroup’s (www.alliantgroup.com) take on the bill and how its tax relief efforts will help both small and medium businesses and the American people.
http://bit.ly/dBbI40

cole

July 30, 2010 6:04 PM

I can't believe Obama isn't getting into banking; he's in everything else. I can see some businesses that needed it yesterday but unfortunately this stuff all takes time and such businesses will go elsewhere or go out of business first. Yet another great idea but who actually has a clue on how to think through all the details and execute? I predict our next President is a business person, not a professional politician (at least I hope so).

Lori

August 3, 2010 2:36 AM

I am a small restaurant business with now 19 employees (2 years ago had 30).Last year I tried to apply for the small business 30k stimulus money.It was a total waste of my and my bookkeepers time!My credit was still excellent and I felt I met all the criteria.The paperwork for this loan was 5 inches thick. A year ago I only needed to sign my name on one piece of paper for this amt. of $!The lender (Big Bank W.F.)said I needed the money too much so I didn't qualify.This government is crazy and I think its time for the people to get them to work for us. Not the other way around.Now its only a matter of time and 19 people will be out of work because nobody cares about small business anymore.Little do they know that we are the backbone of this country!

lou driller

August 22, 2010 9:44 PM

The SBA will work going from 2 million to 5 million if the feds will loosen up on the qualifying, and guarantee more than 75% . i think the banks would lend and the smaller banks would have a chance, to grow. I have been a small bus for 30 years.

singaporerikvin

August 30, 2010 1:40 PM

I guessed, this is the output of the zero percent tax solution given in the article of Mark Gilbert "Interest Rates: The Zero Percent Solution"

So i guess, this now is straight from Fed to government. so that government doesn't have to shoulder the taxes. it is stated in the article that, Fed gives funds to banks with zero percent tax which guarantees them from earning money from free money. Then after, the banks will lend the government. Which makes the government suffer more.

Im glad, this article had been published. very good content btw.

Clifford Jones

January 1, 2011 12:16 PM

Limiting liquidity limits small business growth. Grow out of your cash flow by increasing sales and market share. And get lenders to lend.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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