One Year Later, Checking in on the Small Business Lending Fund


Nearly one year after the Small Business Lending Fund was implemented, institutions participating in the fund have increased their small-business lending by $6.7 billion, according to a report from the Treasury Department.

In the second quarter, small-business lending increased by more than $1.5 billion, according to the government report. However, with small-business optimism on shaky ground according to the National Federation of Independent Business’s latest reading -- which came in at recession levels (92.8) last month, are businesses really looking to borrow and invest?

The SBLF was signed into law by the Obama Administration’s Small Business Jobs Act in 2010. The fund encourages community banks to increase lending to small businesses in order to create new jobs. However, shortly after its implementation, reports surfaced that of the more than $4 billion lent out to these banks, only about $2 billion reached small businesses. The remainder was being used by these community banks to repay Troubled Asset Relief Program debt (TARP), as reported.

A spokesperson for the Treasury Department said the results of the fund at the one-year mark have been very encouraging, and through September 2011, 332 banks had received $4 billion in capital funding, and 9-in-10 increased their small business lending. More than three-fourths of those banks have increased their lending by more than 10%, the spokesperson said.

Treasury interest rates start at approximately 5%, he said, but can drop to under 1%for those banks that have increased small business lending by more than 10% via the fund.

As for banks repaying TARP debt, the spokesperson said there is no dividend advantage to doing so, and essentially repaying this debt frees up other capital to lend to small businesses, making it a non-issue.

However, for his part, Ray Keating, chief economist for the Small Business & Entrepreneurship Council, said he is generally skeptical of these lending initiatives because there is so much capital not being used at present.

“In context of what banks have in reserves already, and how much capital they’re sitting on, I don’t think this is really making any substantive difference in the economy,” Keating said. “Right now, non-borrowed reserves are in the neighborhood of $1.5 trillion in depositories [according to the Federal Reserve].”

This unused capital is down somewhat from its peak of $1.7 trillion in mid-2011, but up significantly from $43 billion in 2007, Keating said.

“That is the real story,” he said. “The problem is not that banks don’t have the capital to lend, the problem is if there are people looking to borrow that are credit-worthy.”

Much is contributing to small business’ cautious outlook toward borrowing, Keating said, including an uncertain regulatory environment.

“There isn’t a high degree of confidence among small business owners. They’re trying to see how this will shake out on so many fronts on the economy, Washington and taxes. When we look at programs like this, I think it’s more posturing and politics than anything else.”