Bleak Small Business Lending Forecast
March 23, 2010

In April 2009, the U.S. Department of the Treasury (Treasury) began requiring the 22 largest TARP recipients to report their small-business lending. Last week, Treasury released a summary report of its most recent survey. The report revealed that the nine largest banks that received TARP funding cut their small-business lending in January 2010.

According to the Treasury report, the banks’ total volume of small-business loans fell by 1 percent in January, while their new loan originations for small firms plummeted 28 percent.

The situation for the banks that completely have repaid their TARP funds is not necessarily better, but they no longer are required to report their small-business lending.

Treasury also revealed that this would be its last summary analysis of the bank survey, claiming that “aggregate month to month changes are no longer meaningful.”

Total lending by U.S. banks in 2009 declined by 7.4 percent, the largest drop since 1942.

Treasury officials, meanwhile, are warning that mounting small and medium bank failures could further threaten small firms’ ability to access to credit, just as the U.S. economy rebounds and businesses seek to expand.

With 192 bank failures since the beginning of 2008, Treasury's chief economist recently stated, “We've been concerned that small businesses, which are particularly dependent on bank financing because they typically don't access corporate bond markets, will face and have been facing difficulty getting credit.”

One expert—Raj Date, the executive director of Cambridge Winter Center for Financial Institutions Policy—estimated that the lending shortfall for small businesses could be as much as $250 to $500 billion as the economy recovers. He predicted that small businesses would begin to experience this enhanced restriction by mid year and that it would last for the next two or three years.

Against this bleak lending backdrop, Congress’ continued tardiness in extending the small-business stimulus provisions is particularly disappointing.

Despite the efforts of Sens. Mary Landrieu (D-La.) and Olympia Snowe (R-Maine), the chair and ranking member of the U.S. Senate Committee on Small Business & Entrepreneurship, a more long-term reauthorization and appropriation for the small-business provisions of the American Recovery and Reinvestment Act (ARRA) was not included in the recently enacted “Tax Extenders Bill.”

The unfortunate result of this exclusion is the specter of yet another expiration of the highly effective U.S. Small Business Administration (SBA) stimulus provisions. The 90 percent guarantee on SBA 7(a) loans and the eliminated borrower fees on both 7(a) and 504 SBA loans currently only are authorized through March 28, 2010.

NSBA repeatedly has called for an extension of these critical provisions through 2010.

While Landrieu and Snowe are openly pushing for a more long-term reauthorization and appropriations sufficient to fund these provisions through the calendar year, it is possible that this will not be achieved before the current expiration date, especially as the provisions may be included in an expected small-business jobs bill.

If the provisions are not reauthorized before their current expiration date, the program inexcusably will lapse once again. Or Congress temporarily could extend the program for an additional 30 days and appropriate approximately $60 million to keep it running for the next month.

It is imperative that Congress quickly extend these provisions through all of 2010. Congress also must begin fleshing out President Barack Obama’s Small Business Lending Fund proposal and explore other ways to combat the escalating credit crunch afflicting America’s small businesses.