President Obama announces help for small business: Treasury will buy up SBA loans with TARP money

March 16, 9:10 PMEconomic Policy ExaminerJoseph Hight

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President Obama speaks to small business, lenders & members of Congress, 

March 16, 2009, East Room,White House, Washington. (AP Photo/Ron Edmonds)

When the owner of a small business that installs tile and granite in kitchens and baths told me he had to lay off eight full time employees – more than half of his workforce - I knew we were a long way away from getting out of the economic crisis. This small businessman – who wished to remain anonymous in order not to let on to his competitors the condition of his business - has been in business for well over 15 years and had built up a reputation of reliability in his market. He had a solid credit rating, but his line of credit that he used to cover payroll while waiting for his receivables to be paid on jobs completed had dried up at his local bank.

So he applied for a Small Business Administration loan at his bank. SBA doesn’t loan money directly to small businesses. Rather it backs the loan by guaranteeing payment of a portion of the loan to the bank, should the borrower not be able to fully repay the loan. For those applicants that meet the SBA's credit and eligibility standards, the SBA can guaranty up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000. The bank was upbeat, and assured the applicant that he was all but certain that his loan would be approved.

But it wasn’t meant to be. The bank loan officer told our small business owner that the bank would not, or could not, make the loan under current conditions, so he had to lay off his workers. When the business owner talked to me on the phone, he asked, “How can they bail out giant insurance companies, giant automobile companies, Wall Street firms and the banks that created this mess, while leaving us small businessmen out to dry?”

At the time, I had no answer. But today, President Obama tried to answer him. The President ordered the Treasury Department to begin purchasing up to $15 billion of SBA loans through the Troubled Asset Relief Program, or TARP. He explained that now "any lender that provides SBA small business loans will have a buyer for those loans."

The White House press release almost seems to be singling out the small business owner who called me:

“But as the flow of credit has dried up during this recession, small business owners who were prudent and responsible have been set back by the behavior of others in our financial system who were not. Businesses with strong credit histories have seen loan applications denied due to conditions that have nothing to do with their own actions and are now struggling to expand their businesses, make their payments or even keep workers on their payrolls. As a result, while the U.S. Small Business Administration (SBA) typically guarantees about $20 billion in loans annually, new lending is trending below $10 billion this year.”

The way the market in small business loans worked before the current crisis is that many banks that made these loans would sell the government backed portion of the loans as securities in an active secondary market. This would free up capital at the banks allowing them to make additional business loans. But the secondary market for all types of securities including these SBA backed loans is frozen. No one will buy these securites backed by SBA guaranteed loans. That is why our small business man – good credit and all - failed to get his SBA loan and had to lay off more than half his workforce.

The President’s move is to order the Treasury to use TARP money to substitute for the frozen secondary market for SBA backed loans. This will get the back log of SBA loans off the books of the balance sheets of the banks, freeing up captital for them to make new loans. And given that the the SBA will now guarantee up to 90 percent of an SBA loan, some of these new loans should flow to small businesses.

Effectively, the Treasury is stepping in where the private secondary market has pulled out.This is a smart move for the President. It should be politically popular, and it may even help lead to that recvorery that we are all hoping for.

I called my small business contact and told him he should immediately get down to his bank and reapply for that loan.

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