A Presidential Promise: Bigger Loans for Small Biz

President Obama traveled to a warehouse in suburban Maryland on Wednesday to outline his long-awaited plan to boost lending to small businesses.

The setting was appropriate: Metropolitan Archives in Landover had used the Small Business Administration’s 504 loan program, which is primarily used for real estate, to expand its operations. The owners are considering another round of expansion.

The SBA’s loan programs are limited, however, in the help they can provide growing businesses because of the limits on the size of the loans. Obama proposes helping these kind of businesses by increasing these loan caps, from $2 million to $5 million for the agency’s flagship 7(a) loans, and up to $5.5 million for certain types of 504 loans.

Lenders and small business groups have been lobbying Congress to increase SBA loan limits, and they applauded Obama’s endorsement.

“There’s clearly a need for the larger loans,” said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.

The decision on loan sizes, however, will be made by Congress, not Obama, and once again the House and Senate committees that have jurisdiction over the SBA aren’t on the same page. The House Small Business Committee approved legislation Wednesday that would increase the size limit on 7(a) loans, but only to $3 million. Its counterpart in the Senate plans to mark up legislation increasing that limit to $5 million.

The president, meanwhile, didn’t endorse what many SBA lenders say is needed to keep the loan program healthy: an extension of the 90 percent guarantee on 7(a) loans that was included in the economic stimulus bill, and reductions and eliminations of various fees on 7(a) and 504 loans. Those enhancements brought lenders and borrowers back to SBA programs, but the stimulus funds that made them possible are expected to expire in late November or early December.

SBA lenders and small business groups have urged Congress to extend these enhancements for at least another year. This would cost an estimated $479 million, however, and no one has an answer as to where that money would come from.

The president didn’t have to find money for the second part of his plan to boost small business lending. He already has it, thanks to the Troubled Asset Relief Program. The Treasury Department will use some of its TARP money to encourage community banks to increase their lending to small businesses. It will do this by making capital available to community banks at a cheaper rate than was available in the past.

Under the program, banks with less than $1 billion in assets will be eligible to receive new capital at a 3 percent dividend rate, compared with the 5 percent dividend rate previously in effect. In return, these banks must submit a plan explaining how they will use the capital to increase lending to small business. They also must file quarterly reports on their small business lending.

About 6,500 community banks would be eligible for this capital program. How many will take advantage of it is an open question.

“There’ll be some takers,” Wilkinson said.

We’ll see. There’s so much baggage associated with TARP that many community banks are likely to say no thanks. Plus, while the president and the Treasury Department are urging them to make more loans, banking regulators are urging them to hold back.

Maybe these guys need to talk to each other. That’s exactly what Obama wants them to do. He’s directed Treasury and the SBA to convene a conference of lenders, regulators, small businesses and congressional leaders to look at what else needs to be done to boost lending to small businesses. Conferences normally don’t accomplish much, but in this case, a little more conservation couldn’t hurt.

“There’s still too little credit flowing to our small businesses,” Obama said.