When it passed in September 2010, the Small Business Jobs Act set aside a $30 billion fund designed for smaller banks (those with less than $10 billion in assets) to lend to small business owners.
Almost one year later, not one single dollar has been dispersed by the Treasury Department, and only about one third of the total funds available to the banks has been requested.
"We have begun notifying banks that have been approved for the program, and expect to begin providing capital very soon," Treasury Secretary Timothy Geithner told the House Small Business Committee in June.
Participation by community banks and other small lenders has been mild at best. The Treasury received 869 applications seeking about $11.6 billion in total. There were more than 7,500 financial institutions that were eligible.
So why is the Small Business Lending Fund a failure?
1. TARP stigma: Banks feared that by accepting the money, it would give the impression that they were in trouble. Although this was not the case, perception is important.
2. Too many strings: Bankers are weary of the strings that come attached to taking money from the government. They don’t want to do the mountain of paperwork involved.
3. Repayment irregularities: Banks that participate in the fund must repay the loans at varying rates of interest (between one and five percent). Banks that increase the number of loans they make by 10 percent or more will see the repayment rates drop to as little as one percent. However, banks that up their lending by less than 10 percent will repay at rates between two and four percent. Additionally, if a bank’s small-business lending does not increase in the first two years, the rate would jump to seven percent and then nine percent after four and a half years (if the bank has not repaid its debts). These rates are less than attractive for the smaller banks.
4. It takes the government forever to put things in motion: Secretary Geithner chalked the slow pace up to being careful and building in safeguards that require each application be reviewed by a bank's primary supervisor and then again by the Treasury. Due diligence is important, but the program is being instituted slightly faster than the rate that the glaciers are melting.
Some analysts believe that demand for small-business loans is weak. However, in processing roughly 3,000 new loan applications at Biz2Credit on a monthly basis, my research shows it is not the case.
Are there better options?
Yes. There are other, more effective ways to help stimulate loans to entrepreneurs. For instance, renewing the 90 percent loan guarantees of the SBA is one effective way to spur lending.
Why did we have to institute a whole new program? It’s better to continue what’s already working. There’s no need to build new roads if the highway only needs a few repairs.
A frequently quoted expert on small business lending and recently named the Top Entrepreneur of 2011 by Crain’s New York Business, Rohit Arora is CEO of Biz2Credit, which connects small business owners with 300 lenders, credit rating agencies and service providers. Since 2007, Biz2Credit has secured $400 million in funding for small businesses in New York and across the U.S. via its safe, efficient online platform.