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Small Business Lending Fund deadline spurs activity but not as much as expected

aroraRohit032311_optBY ROHIT ARORA
COMMENTARY

Some 650 community banks applied for just over $9 billion in capital from the U.S. Treasury Department’s Small Business Lending Fund (SBLF) as the deadline for savings institutions passed on May 16. We can expect further activity up until June 6, the deadline for community banks to apply for the funding.

The $30 billion fund was created last fall to provide low cost capital to community banks to stimulate small-business lending by offering lower rates when the banks make loans to entrepreneurs. However, the applications are expected to fall short of the lending pool’s maximum allowed.

There are several reasons for the reluctance of banks to participate. Many institutions didn’t know how they would use the available funds. Others were wary of the oversight from the government supported money. The TARP experience of small- to mid-sized banks was not good, and the taste is still bitter. Additionally, the perception still lingers that anyone participating in the SBLF may face insolvency. While this is generally not the case, many banks don’t want to be “guilty by association.”

The Obama Administration, which marked National Small Business Week last week by touting its efforts to help small firms gain access to credit, is partly to blame. They simply did not do a good enough job of marketing the SBLF to financial institutions. While spokespeople called the fund a success, banks have applied to use only about one-third of the funds available.

Meanwhile, small business owners have reluctance about borrowing. There is still uncertainty in the economy, which makes it hard for small businesses to forecast there financial needs. Roller coaster gas prices and the “jobless” recovery are the primary causes for this uncertainty.

While several large institutions, such as Bank of America and Wells Fargo, have announced that they plan to increase their lending commitment to small businesses in 2011, our recently released Biz2Credit Small Business Lending Index found the opposite. The analysis of 1,000 loan applications found that approval rates for small business loan requests fell from 10.6% in the 4th quarter of 2010 to 9.8% in the 1st quarter of 2011. Meanwhile, lending at smaller banks rose slightly from 43% in last quarter of 2010 to almost 45% in first quarter of 2011.

Among the most frequently reported reasons why small business borrowers have not received funding are:

  • Banks are requiring more collateral in order to grant a loan (even under existing SBA guarantees),
  • Small companies’ falling revenue and profitability over the past two years, and
  • Bank reluctance to approve loans to companies in business for less than three years.

Meanwhile, borrowers are discouraged by the fact that loan-making decisions are taking a long time to complete and by the perception among small business owners that they are unlikely to be successful in securing loans.

With its stated focus on helping small business growth, the Obama Administration must continue policies that support innovation and entrepreneurship. In addition to setting up credit programs such as the SBLF and two new SBA lending initiatives, it has passed a number of tax cuts for small businesses into law. The breaks include allowances for businesses to immediately write off the expense of new equipment instead of depreciating the cost over time.

The President and federal agencies must continue to make the case for supporting small businesses and instill confidence among financial institutions that the efforts will not become burdensome. We are now in a time when partisanship should be put aside. Small businesses are struggling in states such as New Jersey, New York and California – and the picture isn’t much rosier in the more conservative states in the Midwest. For the economy to rebound fully, we must support the portion of the economy that creates the most new jobs across the country: small businesses.

A frequently quoted expert on small business lending, Rohit Arora is CEO of Biz2Credit (www.biz2credit.com), which connects small business owners with 300 lenders, credit rating agencies and service providers via its safe online platform. Since 2007, Biz2Credit has secured $400 million in funding for small businesses in New Jersey and across the U.S.

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