By Larry Jones
March 23, 2009

President Barack Obama announced plans on March 16 to boost the flow of credit to the nation’s small businesses, which are a critical part of the local economy for American cities. The recession, driven by mortgage foreclosures, has made it very difficult for small businesses to borrow money to finance both short-term and long term needs. Under normal circumstances primary bank lenders make loans to small businesses and then sell those loans to bigger banks in the secondary market. By selling these loans to bigger banks, community banks and credit unions keep getting an influx of capital that enables them to keep the credit cycle going so they can make more loans available to small businesses. But due to the credit crisis bigger banks and investors have been reluctant to purchase these loans, causing credit to dry up.

Under the President’s plan, starting at the end of March, the Treasury Department will use $15 billion in Troubled Asset Relief Program (TARP) funds to begin purchasing small business loans backed by the Small Business Administration (SBA). The Treasury Department will also be prepared to purchase new SBA backed loans purchased between now and December 31. These purchases will help restore confidence in the credit market so banks can start lending to small businesses again.

The President also announced a temporary increase in SBA’s loan guarantee. Currently, banks making loans to small business can request that SBA guarantee up to 85 percent for loans at or below $150,000 and up to 75 percent for larger loans. Under the President’s plan, loans will be guaranteed up to 90 percent. This will also help provide banks the greater confidence they need to begin extending credit to small businesses during the recession.

Loan fees will also be eliminated on a temporary basis. The SBA will temporarily eliminate the processing fees charged to borrowers and third-party participation fees charged to lenders. These measures will reduce the costs to both borrowers and lenders participating in SBA programs that have proven effective in generating community development and creating jobs.

Joining the President at the press conference, Treasury Secretary Tim Geitner announced that the 21 largest banks receiving financial support under the Financial Stability Plan Support will be required to report on how much small business lending they do every month. Also, small business with gross receipts of up to $15 million will be allowed to take advantage of a five-year “carry back” rule that will enable them to carry back their losses for up to five years, effectively giving them a rebate on previously paid taxes.

Earlier this year, Conference President Miami Mayor Manny Diaz sent a letter to Geithner urging him to make the changes announced by the President in support of small businesses. In a March 16 press release, Diaz praised President Obama for his plan to assist small businesses. “The President’s plan to unlock credit for small businesses will save businesses, allow them to grow, and save and create thousands of jobs,” he said.