We knew that the credit crunch had taken its toll on small businesses between June 2009 and June 2010, but until recently we did not know how severe the drop in lending really was. Last week, the Small Business Administration (SBA) reported that the total value of outstanding loans to small businesses plunged by $43 billion, that's 6.2 percent, during the aforementioned 12-month period. And that was a drop of $59 billion, or 8.3%, from June 2008.
The SBA based its assessment on data from the Federal Deposit Insurance Corp. (FDIC), which tracks lending by banks. Reduced demand — stemming from pessimism among small business owners, declining sales during the recession, fewer plans for expansion and capital investments — certainly played a role in the drop. However, lenders, particularly big banks, closed the spigot on lending, essentially cutting off small businesses from their sources of capital. Since they generally cannot sell stock or entice outside investors the way larger companies do, small businesses felt the sting of credit crunch particularly strongly.
"Small businesses are important to the national and local economy, but their existence depends on their ability to access credit," the SBA found in its report. In a show of accountability, the agency counted itself among the organizations that slowed access to capital. While the SBA does not make direct loans, it insures qualifying bank loans against default, and both the number and the dollar value of loans backed by the agency's flagship 7(a) program plunged from 2007 to 2008 and again the following year.
With the help of government stimulus programs, the SBA put a series of measures in place to boost lending. SBA-backed loans rose in the 2010 fiscal year ending Sept. 30 to $12.6 billion — ahead of 2009's figure, but shy of 2008's total.
So what's being done now?
The Small Business Jobs Act passed last fall and authorized the creation of a $30 billion fund run by the Treasury Department that offers affordable capital to banks with less than $10 billion in assets. The goal was/is to put capital into the hands of smaller lenders, such as community banks, which will provide access to the lending pool to small businesses owners.
Meanwhile, the SBA has developed two new programs that geared toward providing credit to businesses in underserved communities. The agency's Small Loan Advantage will offer loans up to $250,000 to small companies. The initiative includes an 85 percent guarantee for loans up to $150,000 and a 75 percent guarantee for loans between $150,000 and $250,000.
The SBA's Community Advantage initiative seeks to increase the number of SBA 7(a) lenders that reach underserved communities and were not previously able to offer SBA loan. The program will also offer up to $250,000 with an 85 percent guarantee for loans up to $150,000 and a 75 percent guarantee for loans of more than $150,000. The Community Advantage program is available to community development financial institutions, certified development companies (CDCs), and nonprofit micro lenders.
Both of these programs are good news for many New Jersey-based entrepreneurs. They will help firms such as Medical Transcribing Services, Inc., a minority-owned company based in Hammonton, NJ, which recently received $500,000 — at a prime plus one rate — through Biz2Credit.
While traditionally the business community has sought laissez-faire policies, in this time of economic uncertainty, these government-supported incentives to small business development can and should be welcomed. This week, President Obama's budget allotment for the SBA will be lowered in 2012. The government must carefully weigh the desire to cut deficits with cutting the funding desperately needed to help small businesses grow and create jobs.
Rohit Arora, an expert on small business lending, is co-founder and CEO of Biz2Credit (www.biz2credit.com), which connects small business owners with 150+ lenders and service providers via its safe online platform. KPMG ranked Biz2Credit among the top 100 emerging companies in 2008.
ALSO BY ROHIT ARORA