Will Community Banks Offer a Lifeline to Small Businesses?

Will Community Banks Offer a Lifeline to Small Businesses?Small business owners already know loans from big banks are drying up, but a Treasury Department report released last week proved it. Eleven of the 22 banks that received Troubled Asset Relief Program (TARP) bailout money from the federal government slashed their total small business lending balance by some $2.3 billion in December, CNN Money reports.

This was the eighth month in a row that the 11 banks’ lending declined; seven of them have cut their small business lending every month since receiving the money. It’s possible other major banks’ lending has declined as well, but 10 of the 22 banks have paid back the TARP funds, so they no longer have to report their small business loan data to the Treasury Department.

If big banks aren’t much help to small business, President Obama is hoping that community banks can be. According to CNN Money the president fleshed out a proposal mentioned in his State of the Union address last month that would use $30 billion in TARP funds to create a government lending program giving community banks access to very cheap capital if they used it to boost small business lending.

The president initially pitched a version of the plan back in October, but community bankers didn’t like the idea of getting involved in TARP because the program has stringent regulatory restrictions and has attracted a lot of ire from the general public.

The president’s current proposal would divert TARP funds into a completely new lending program, separate from TARP, to make it more appealing to the bankers. Banks can borrow at a dividend rate of as little as 1 percent. The rate decreases as the amount of money lent to small businesses increases, incentivizing the banks.

However, getting Congress to enact the proposal will be an uphill climb. One Republican senator, Judd Gregg (R-NH) already expressed opposition, telling CNN Money, “The law is very clear. The monies recouped from the TARP shall be paid into the general fund of the Treasury for the reduction of the public debt. It’s not for a piggy bank because you’re concerned about lending to small businesses.”

Rieva Lesonsky Rieva Lesonsky is a Columnist for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Visit her blog, SmallBizDaily, to get the scoop on business trends and free TrendCast reports.