Solutions to small business lending crisis
By Frank Knapp, Jr. - 05/17/10 01:18 PM ET
Members of Congress need look no further for the cause of voter unrest. The answer is in
the Congressional Oversight Panel report released last week.
For many months now, small business owners have been trying to tell anyone who would
listen that they are suffering from being largely shut out of the credit market. The
Troubled Asset Relief Program (TARP) might have stabilized the nation’s too big to fail
banks and our financial system, but small businesses know loans and credit lines from
these giants are still scarce.
Now, we have the facts to back up small business complaints. The new report, “The
Small Business Credit Crunch and the Impact of the TARP,” finds the nation’s 22 largest
banks receiving TARP funds reduced their lending between 2008 and 2009, with small
business loans down twice as much as overall lending. TARP delivered for big banks, but
not small businesses and their employees.
The big banks went right from the TARP emergency room back to the gambling hall.
Last month, Bank of America reported a $3.2 billion first-quarter profit due to the profits
from proprietary trading. Making business loans just can’t deliver the fast profits to
which these financial behemoths have become addicted.
The situation with community banks is just as dismal for small business. Federal bank
regulators haven’t reined in Wall Street’s gambling with derivatives and other risky
trading, but they have clamped down on community banks to reduce the risk on their
balance sheets. Community banks have tightened credit criteria so much so that even
longtime solid businesses can’t get the credit they need.
The Administration has had some success encouraging financial institutions to make
SBA loans by raising loan guarantees and waiving fees. But SBA loans only represent an
estimated 4 percent of the credit needs of small businesses. In my state of South Carolina,
community banks made just 29 SBA loans in the first quarter of this year.
Understanding voter unrest is very simple when you’re looking up from the bottom.
In every community across the country, small businesses are being forced to close their
doors, putting employees out of work because they can’t get a line of credit. Small
business owners can’t get loans to grow their business to meet increasing demand. These
entrepreneurs have worked hard, played by the rules, bailed out our economy with their
tax dollars and this is what they get.
So what do small businesses need Congress to do to solve this lending crisis?
Focus the effort. About 95 percent of the nation’s businesses have less than 50
employees, and about 90 percent have less than 25 employees. Forget the other federal
definitions of a small business. The 5, 15, 30 and 45-employee businesses are where the
real need is for credit and loans. These are the small businesses that economists say must
create the jobs to get us out of this recession.
All hands on deck. Increasing SBA loan limits, guarantees and waiving fees is helping,
but relying solely on new SBA lending efforts is not going to get the job done.
Community banks need federal cash infusions to improve their financial stability but only
with effective incentives to yield more loans to small businesses. Credit Unions need to
have their business-lending cap raised. All other vehicles for increasing lending to small
businesses need to be nourished and enhanced.
Reform Wall Street. Never again should small businesses and consumers pay for the
greed and failed backroom deals of our financial institutions. Transparency and
regulatory oversight of transactions is imperative if we are to protect the country from
another bank-made great recession. Included in this reform should be a strong,
independent Consumer Financial Protection Agency that promotes financial product
safety and encourages accountability and fair competition.
Make banks be banks. Congress got it right in 1933 when it passed the Glass-Steagall
Act to separate commercial banks and investment institutions to protect consumers and
the nation’s economy. Making loans can never compete with the lure of fast gambling
profits, but our economy can’t grow without stability in lending. Banks should be
restricted from proprietary trading once again and even “non-banks” should have their
proprietary trading reined-in for the long-term fiscal health of the country and world.
These actions to reinvigorate small business lending might not work fast enough to tame
the angry voter by the midterm elections. But when you’re at the bottom and no money is
flowing, any effective assistance will be noticed.
Mr. Knapp is the president and CEO of The South Carolina Small Business Chamber of