After an immense financial bailout for big banks on Wall Street, small businesses will finally get the stimulus they've been asking for, said President Obama in a speech last week.
The announcement, made at Landover, Maryland-based Metropolitan Archives, a family-owned paper records storage company, discussed the administration's initiative to stimulate the economy by increasing loan access to small businesses. The president said he hopes to accomplish this by increasing the size of Small Business Administration loans and boosting credit to community banks – "winding down" the Troubled Asset Relief Assistance (TARP) to major banks and funneling those resources to small businesses.
"There's still too little credit flowing to our small businesses," Obama said at the company, which he cited as an example of those in need. "There's still too many entrepreneurs who can't get the loan they need to open up their doors and start hiring."
Though officials are still hammering out details of the plan, what is known is that the maximum size for the SBA's 7(a) loan program, which helps businesses invest in equipment, land and building, would be raised from $2 million to $5 million. In addition, the Microloan program, a short-term loan that aids in purchasing supplies and inventory, would expand from $35,000 to $50,000. Long-term, fixed-rate 504 loans to manufacturers will increase from $4 million to $5.5 million, and from $2 million to $5 million for all other businesses. The Treasury Department is proposing that community banks with assets under $1 billion receive capital at a 3 percent interest rate – down from the previous rate of 5 percent.
"When banks like these are hit by recession and financial crisis, creditworthy small businesses lose out, and that means less expansion and fewer new jobs, just when we need them the most," Obama said.
William Dennis, senior research fellow at the National Federation of Independent Businesses research foundation, says that while the administration's plan is a step in the right direction, its effectiveness may be crippled by the wariness many community banks harbor toward TARP funds.
"It's toxic to banks," Dennis says. "As soon as you say, 'TARP,' banks go the other way."
Citing the Obama administration's recent decision to slash executive pay of banks that received bailout money, Dennis says there are so many provisions and "strings" attached to the TARP funds, many of the smaller banks won't be eager for that level of scrutiny.
"It's a potential hazard in this thing that is otherwise a nice initiative," he said.