George S. May Business Blog

Small Business a Big Priority for U.S. Economy

The U.S. Treasury said on Friday that a White House proposal for a $30 billion loan fund would help to stop the credit drought for small businesses, as business owners said their inability to get financing is curbing expansion, and hurting viability in a slower economy.

The Obama administration has said plenty of the right words to win the favor of small business owners;  a socioeconomic group which is actively courted by both political parties who paint small businesses as the backbone of American industry.

However when the banks slowed their lending, they especially were wary of small businesses, especially when larger businesses seemed to be dropping like flies. But if this administration hopes to get the support of the self-employed, he’s going to need more than just kind words.

The Obama administration is concerned that small banks would avoid any program thus established under the Troubled Asset Relief Program because of a stigma associated with government bailouts, said Herbert Allison, assistant Treasury secretary for financial stability, told a joint hearing of the House of Representatives Financial Services and Small Business committees.

“I can tell you that a TARP program would not be nearly as effective to achieve your goals of stimulating lending as a program would be outside of TARP,” Allison said.

President Obama proposed a small business loan program earlier in the month that would use $30 billion in TARP funds already repaid by larger banks and funnel it to a new program, which would requires congressional approval. Banks would be able to access the funds at reduced rates, and their funding costs would dip as they made loans, with the idea being that it’s encouraging them to boost lending to small businesses.

Allison said smaller institutions that accessed government capital through TARP have struggled with executive compensation restrictions under TARP, because those rules give no deference to the size of a company.

Even if Treasury removed some of those unseemly restrictions, many lenders would likely still avoid TARP participation due to a belief that there is a negative connotation linked to the program and fear that they could be subjected to retroactive restrictions, Allison said.

Allison and top bank regulatory executives heard several hours of complaints from lawmakers and business owners about lack of credit and overly harsh bank examinations that led to credit lines being pulled, which forced some businesses to shut down.

The chairman of the House Small Business Committee, Nydia Velazquez, a New York Democrat, said the Treasury was asking for a “blank check” to give to banks with no guarantee the funds would be loaned out to the appropriate types of businesses they hope to buoy with this move.

Vasquez said the current situation reminded her of when former Treasury Secretary Henry Paulson “was sitting there, telling us, ‘Don’t worry, don’t put any restrictions on any of these funds, because I can guarantee that lending from financial institutions will happen for small businesses.’ Today, a year later, we have seen the consequences,” and these consequences are still causing trouble, as we can plainly see.

Small business owners and their advocates told the panel that they have suffered through a three-year drought in lending and asked lawmakers to simply bypass the banks altogether and turn the Small Business Administration into a direct lender of government funds. Currently, the SBA provides guarantees for up to 90 percent of loans made by banks through its programs.

Steve Gordon, president and owner of Instant Off Inc, a told the panel that his firm could create 25 new jobs immediately, but it cannot get financing to expand operations.

“Jobs can only be created with capital, and the bailed out banks are not helping the situation,” Gordon said. “The American people do not want to give any more money to the banks.”

SBA administrator Karen Mills said the fastest way to increase lending was not by creating a direct loan mechanism, but by funneling money to banks while easing restrictions on some of the SBA’s most popular loan restrictions.

Federal Reserve Governor Elizabeth Duke expressed her belief that lending would expand noticeably in the 2010 fiscal year. Duke pointed to the actions of banks focusing in on new loans, as opposed to managing old debt as they had been in recent years.

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