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.
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