Lending plan aims to boost small businesses

The Obama administration has introduced measures that include spending $15 billion to help U.S. small businesses receive loans needed to help them survive the economic crisis. The administration intends to pay for the plan with funds from the $700 billion economic stimulus package.

The plan allows the government to buy small-business loans so banks and other lenders can start lending again. The government also will increase its guarantee of the Small Business Administration's (SBA's) primary loan program, which reduces the amount of money lenders can lose if borrowers default on loans.

"Small businesses are the heart of the American economy," President Obama says. "They're responsible for half of all private-sector jobs, and they created roughly 70 percent of all new jobs in the past decade ... But today, too many entrepreneurs can't access the capital to start, operate or grow their businesses. Too many dreams are being deferred or denied by a form letter canceling a line of credit."

Critics of the plan say it may end up benefiting big banks and lenders more than small businesses because lenders would take fewer risks and see larger profits using the SBA loan program instead of an ordinary loan program. This could lead lenders to steer borrowers into the SBA program even if they qualify for ordinary loans.

Others believe even if the plan works, its effects could be limited because the SBA program tends to account for a small share of lending to small businesses. They say that because much of the loss is covered by the government, banks will disregard risk, which exposes taxpayers.

However, Bob Coleman, publisher of the Coleman Report, an industry newsletter for SBA lenders, says the plan should bring lenders back into the market.

"We will have additional losses, but a couple hundred million in losses is an excellent return to retain the jobs that are out there and to create new jobs," he says. "It makes excellent economic sense to get involved with this process."

Although the government predicts the program will cost it little as loans are repaid over time, the program's final cost is unknown.

Date : 3/25/2009