Posted: April 16, 2010

By Michael Schwartz

michael.schwartz@insidebiz.com

There are two sides to the recent debate over the state of small-business lending.

Many small businesses argue that banks just aren't lending to a segment many say is the key driving factor to economic recovery, and denying them capital will only keep us bogged down in a recession.

Many banks argue they would love to be lending more and they don't deny that small-business loan demand is high. The problem is banks are being forced, both by regulators and in attempt to combat rising levels of bad loans, to be more risk-averse than normal.

That leaves small-business borrowers, many of which are deemed risky in a recession, without a chance to get the capital they say they need.

So with all this chatter coming from both sides, it begs the question: Whatever happened to President Barack Obama's proposed Small Business Lending Fund?

It was an idea he introduced on Feb. 2 that would take $30 billion in funds from the Troubled Asset Relief Program and funnel it to small community banks along with financial incentives to entice them to increase their small-business lending.

But since the day he introduced the idea, the proposed program has rarely been mentioned and hasn't been able to gain traction either in Congress or among the banking industry lobbyists and trade groups.

The president's proposal said small community banks with less than $10 billion in assets account for 50 percent of all small-business loans nationwide, though they make up only 20 percent of all bank assets.

The SBLF, though it would use TARP funds, would be separate from the much maligned program that garnered negative attention from the public as being a bailout.

SBLF called for incentives that would allow banks that still have TARP capital on their books from the Capital Purchase Program to decrease their dividend levels as their small-business lending activity through SBLF increased.

But Bruce Whitehurst, CEO of the Virginia Bankers Association, said he believes separating the money and the negative perception from TARP isn't that easy, as those scars apparently run deep.

"There's a fair amount of skepticism as to whether a lot of banks would embrace the notion of using TARP funds," said Whitehurst. "It's a once-bitten-twice-shy kind of thing."

Bob Bailey, Hampton Roads regional president for Union First Market Bank, argued that the SBLF hasn't caught on because lack of capital is not the problem in this case.

"There are many factors which could increase small-business lending, but community bank capital levels is not very high on the list," Bailey said.

The biggest problem is a lack of qualified, low-risk small-business borrowers. The recession has left too many small businesses with an inability to prove to banks that they have the ability to repay the loans.

"I can tell you we want to make every loan we believe will be paid back on time," Bailey said. "It is how we make our living. However, we are not speculators or venture capitalists."

If the SBLF does begin to gain favor, Whitehurst wonders whether the fund can get money out on the streets fast enough to make an impact.

"Can you get it to market before the market doesn't need it anymore?" Whitehurst said.

Since banks seem to want no part of the risk, Small Business Administration loan guarantee programs may help both sides come to the table, Bailey said.

"If the government believes low-risk applicants are being denied access to credit, it can back the loan and assume the associated risk," Bailey said.

But therein lies another roadblock for small-business lending - with SBA loans the taxpayer ends up covering the defaults. nib