As unemployment continues to remain high, we must look for ways to allow small businesses to expand and create jobs. Small businesses are engines for job creation—they create 80 percent of new jobs—but the recession has taken a toll on small business owners’ ability to access the credit they need to expand their businesses. A number of initiatives have the potential to increase small business lending to sound borrowers.
Creating a Small Business Lending Fund
President Obama continued his push last week for the creation of a Small Business Lending Fund that would increase capital to small financial institutions so that they would increase their small business lending. The Small Business Lending Fund Act (HR 5297) has passed out of the House Financial Services Committee and is likely to be voted on by the House this week. HR 5297 would also support several innovative state programs that encourage lending to small businesses.
The Small Business Lending Fund would have $30 billion to purchase preferred stock from approved small financial institutions, boosting their capital available to lend. The institutions would have to submit a small business lending plan when applying for the fund and they would have an incentive to increase their lending, since institutions would pay lower dividend payments based on how much they increase their small business lending—as little as 1%, if they increase lending by 10% from 2009. Institutions who serve women- and minority-owned small businesses and underserved communities will receive special consideration.
States will be able to apply for funding, based on the severity of their employment declines, to support small business lending initiatives that are threatened by state budget cuts. They will be able to expand innovative programs that leverage private funding to encourage lending, such as:
- Capital Access Programs, which contribute to financial institutions’ loan loss reserves, allowing them to take on more risk and expand lending;
- Collateral support programs, which assist businesses who are viable but who struggle to get credit because the value of their collateral has fallen;
- Loan guarantee programs, which provide partial guarantees on small business loans.
Improving Existing SBA Programs
In addition to these initiatives, Small Business Administration (SBA) programs, such as the Express Loan Program and Community Express Loan Pilot, should be expanded. Woodstock supports the Express Loans Improvements Act (HR 4598), which would increase the Express Loan limit from $350,000 to $1 million and would temporarily increase the federal guarantee from 50% to 75%. In addition, the SBA Community Express Loan Pilot Program, which provides streamlined and expedited loan procedures to borrowers in underserved communities, should be made a permanent program.
Enhancing Fair Lending Disclosures for Small Business Loans
In order to ensure that these programs are benefiting the intended recipients and that fair lending laws are being enforced, there needs to be enhanced data collection that includes:
- race and ethnicity of the business’ principal owners;
- amount of credit applied for and approved;
- type and purpose of the loan;
- the census tract in which the business is principally located;
- action taken with respect to the loan application;
- gross annual revenue of the business.