More Small Business Loans, Anyone?

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http://www.kiplinger.com/businessresource/forecast/archive/Obama_Moves_to_Bolster_Small_Business_Lending_090331.html

At the risk of backlash, the Obama administration is bolstering SBA lending -- but will find few takers.

The Obama administration is striving to make small business lending more attractive, guaranteeing up to 90% on Small Business Administration (SBA) loans and creating a new secondary market for them.

The policy changes at SBA will help some small businesses. But it'll take significant economic improvement for most firms to want to borrow.

"There will be some pent up demand because the banks have pulled back some," says Todd McCracken, president and CEO of the National Small Business Association. "But I don't expect to see big increases in lending until we see an uptick in the economy."

Loan volumes associated with SBA programs are down because banks and other traditional lenders tightened their lending standards and the overall creditworthiness of businesses, including the value of their assets -- which banks assess in making loans -- has dropped. Banks are also more hesitant to lend in the face of rising loan defaults and because of a lack of liquidity.

But volumes are also down because many small businesses are deferring capital projects. Uncertainty about the length and severity of the recession is suppressing loan volumes, says Robert Seiwert, senior vice president of commercial lending at the American Bankers Association. "Confidence drives loan demand," he says.

The amount of loans guaranteed under the SBA's flagship 7(a) program has plummeted by nearly 60% since October 1, 2008. New lending is trending below $10 billion so far this year -- about half of what it would be in a typical year.

In fact, the Obama administration is taking flak for its bold moves to bolster small business lending. Critics point out that with loan default rates rising sharply, the administration should not be offering higher guarantees and reducing loan fees at taxpayers' expense.

But for those firms that are expanding, industry insiders say, the administration's moves will go a long way to at least bring bankers back to the table. Treasury's latest initiative to buy up to $15 billion in securitized SBA-backed loans using funds from the bank bailout program will help get credit flowing again so that banks can make new loans.

Under the stimulus bill, the SBA is providing loan guarantees in its 7(a) program for up to 90% through 2009 and is reducing or waiving lender and borrower fees for some loans approved after February 16. The moves make it more profitable and less risky for banks to make loans.

The program is trying to find the right balance and give lenders more confidence, says Chris Reilly, president of CIT Group Inc.'s CIT Small Business Lending Corp.

Small firms on the cusp of qualifying for a loan will benefit from this added confidence. "For those applications that are on the bubble, this program will turn the 'no' into a 'yes,'" says Seiwert.

The Department of the Treasury will also put more pressure on banks to make more small business loans. Treasury Secretary Timothy Geithner says he is requiring the 21 largest banks receiving government funds under the Financial Stability Plan to report their small business lending every month. Geithner also called on banks to release their small business lending reports once every quarter instead of just once a year.

CIT's Reilly says the administration's initiatives indicate their recognition that "small businesses are critical to our economic recovery and time is of the essence."