Small Business Lending Fund

Overview

The Small Business Lending Fund is a part of the Small Business Jobs and Credit Act of 2010, legislation that was signed into law on September 27, 2010. The Fund earmarks $30 billion available in loans for small business as an incentive to boost the economy and increase job creation.

Background

On February 2, 2010, President Obama announced his support of a proposal that would create a $30 billion Small Business Lending Fund from funds earlier designated to be a part of the Troubled Asset Relief Program (TARP) that lent money to financial institutions in late 2008 and 2009.

Under this proposal, which must be approved by Congress, $30 billion in TARP funds would be transferredto a new program outside of TARP to support small business lending. This new program complements other SBA lending initiatives the President has already announced – including support for higher SBA loan limits and extending Recovery Act provisions for higher loan guarantees and temporary fee eliminations – as well as tax cuts to encourage small businesses to invest, hire and raise their workers’ salaries.

Key provisions

• Targeted at Community and Smaller Banks that Lend the Most to Small Businesses
• Established Separately from TARP to Encourage Maximum Participation
• Core Proposal for New Fund Would Be to Offer Capital Investments With Incentive for Banks to Increase Small Business Lending

Elements of the Small Business Lending Fund

Limited to Community and Smaller Banks Which Devote a Higher Share of Lending to Small Businesses: The Small Business Lending Fund would support lending among small-and medium-sized banks (with assets under $10 billion). These banks devote the highest percentage of their lending to small businesses in their communities, accounting for over 50 percent of all small business loans nationwide, even though they make up only about 20 percent of all bank assets.

2. Program Would Be Separate and Distinct from TARP to Encourage Participation: By transferring, through legislation, $30 billion to a new program that would be distinct from TARP, the Administration’s proposal would encourage broader participation by banks, as they would not face TARP restrictions.

3. A Core Function of New Fund Would Be Offering Capital With Incentives to Increase Small Business Lending: The Administration’s core proposal for the new lending fund is an initiative to invest in smaller banks capital under terms that provide strong incentives to increase lending. As participating banks increase lending to small firms compared to 2009 levels, the dividend paid to Treasury on that capital investment would be reduced. This proposal has two key advantages:

• Capital Could Be Leveraged Several Times to Support New Lending: While the Administration’s proposal could provide $30 billion in capital to banks, these institutions would typically leverage that funding several times over when increasing lending. As such, that $30 billion could potentially support multiples of that amount in loans.

• Incentive Structure Supports Immediate Increases in Lending Over 2009 Baseline: By reducing the dividend on the capital investment that community and smaller banks receive, based on increased lending over a baseline set using 2009 data, this program ensures that lenders have a strong incentive to increase total loans to small businesses. Because banks would get credit for any increase in lending during 2010, if they plan to join the program they should have an incentive to increase lending immediately so they could realize the benefits of a lower dividend rate on the investment as soon as they entered.

4. Administration Will Discuss with Congress Additional Ideas to Enhance Credit for Small Businesses Through the Small Business Lending Fund. While the Administration is presenting its plan to provide capital with an incentive structure to maximize small business lending, it looks forward to discussing with Congress other ways that – in addition to what is described above – the Small Business Lending Fund could be fully deployed.

Reaction to the proposal

New Hampshire Senator Judd Gregg, the senior Republican on the Senate Banking Committee, issued a statement opposing the proposal, saying the repaid TARP money is required under the law to go toward repaying federal debt. House Minority Leader John Boehner said the program won't solve the fundamental problem with the economy. Trade groups including the American Bankers Association and the Independent Community Bankers of America endorsed the idea.

See also

• SmallBusiness.com Policy Hub

External links

• WhiteHouse.gov - President Obama Outlines new small business lending fund