When Will True Small Business Lending Recover?
Oct 6th, 2010 @ 7:29 PM by Amber Nelson
Since Congress passed the Small Business Jobs Act just a few weeks ago, the government has backed another $5 billion in loans to small business owners. These hard working folks had all been on a long waiting list, the Recovery Queue so-called since the time money ran out from the last small business stimulus infusion. And I’m glad they are getting their funding – they need it and the economy needs them to get it. But I’m wondering when the private sector is going to open the capital spigot and start lending on its own again.
Since the Recovery Act of 2009, which incentivized lenders by increasing guarantees from 75 percent to 90 percent, and by waiving some of the normal loan fees, the money to fund these incentives has run out four times and been extended that many times.
Because of the government help
“tens of thousands of small businesses have been able to get the capital they needed to not just survive the recession, but to grow and create much-needed jobs in communities all across the country,” said SBA Administrator Karen Mills in a statement, as quoted in a CNN article Tuesday.
Small businesses were hit particularly bad during the financial crisis, with private capital essentially drying up around the country. The government stepped in to jump start lending again with its stimulus money and lending immediately picked up, but each time the money ran out, small business lending would tank only to be revived again with the next renewal of the stimulus.
So why are private lenders SO scared to lend in the absence of major government guarantees? Small business loans are certainly considered riskier than loans to large corporations, but at some point those smaller loans will start to pick up again. The question then is: if the government incentives were allowed to run out for good, would private lenders then stop expecting aid and start lending on their own again? That would certainly be ideal, but then again what would small businesses do for funding during that transition time? Perhaps that problem is the reason the stimulus has been renewed at least for the remainder of 2010.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.