The Credit Crisis: Obama’s New Plan to Stimulate Small Business Lending

Most franchisors would agree that the biggest problem currently facing the franchise industry is the lack of credit.  In this recession, bank lending to small businesses has all but dried up, with the total number of Small Business Administration (SBA) loans falling precipitously in 2008 and again in 2009.  With less credit to go around, franchisors have found it difficult to close deals for even well-qualified franchisees.  The lending picture has been even worse for restaurant concepts, with banks refusing to extend financing to all but the best-capitalized applicants.  

While the effects of the credit crisis are well known, the cause is less certain.  Some employees of the SBA blame the banks, accusing them of being unreasonably tight-fisted and afraid of doling out their liquid cash.  The banks, on the other hand, blame the regulatory authorities, which they say have changed lending guidelines to make it difficult for banks to make critical small business loans. 

During his State of the Union address last week, President Obama announced a plan to divert $30 billion from the TARP bank bailout to create a new program to encourage small business lending.  The program would apply to small and medium-sized banks with total assets under $10 billion, which are responsible for more than 50 percent of small business loans nationwide.  A bank participating in the program would be able to borrow from the Treasury at an interest rate as low as one percent if it is able to show a ten percent increase in small business lending.

Currently, the President’s proposal is just that: a proposal.  Because it would be diverting TARP funds to create an entirely new program, Congress must first approve.  That may be difficult, as Republican leaders would rather see the money used to pay down the national debt.

Although I am no fan of reckless government spending, I do think that the quickest way out of this recession is to jump-start small business lending.  I’m afraid, however, that the President’s proposal is too little, too late.  The government missed an opportunity when it doled out TARP money during the first go-around; it should have conditioned the award of funds on the banks’ agreement to make loans to small businesses.  Instead, the largest recipients of TARP money cut their small business lending, which I think contributed to the length of this recession.

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