MONEY

Bernanke Urges Banks to Up Small Business Lending

Government-backed loans to small companies have dipped sharply, no thanks in part to a key federal program running out of money.

Chip Somodevilla/Getty

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Federal Reserve Chairman Ben Bernanke is urging banks to lend more to small businesses, which employ at least half of American workers.

"Making credit accessible to sound small businesses is crucial to our economic recovery, and so should be front and center among our current policy challenges," Bernanke said at a day-long forum on small-business financing in Washington on Monday. From February 3 to June 30, the Fed held 43 meetings in cities across the U.S. on the cash needs of small businesses.

The pressure from Bernanke on banks came as government-backed loans to small firms – defined as those with fewer than 500 employees – took a plunge in the first quarter of this year. Lending to such companies dipped below $670 billion from more than $710 billion in the second quarter of 2008, according to government figures.

It doesn't help that two key U.S. Small Business Administration loan programs in May ran out of money to support breaks that provided higher guarantees and lower fees – and for the fifth time. Legislation to renew the programs – which guarantee loans for 90 percent of their value, as opposed to the pre-2009 75 percent -- has passed the House but stalled in the Senate. Banks made less than $400 million in loans backed by the 7(a) and 504 programs in June, down from $1.5 million in May, according to SBA figures. The total number of loans also fell sharply, from about 5,000 in May to about 2,000 in June.

The Senate is expected this month to consider renewing the program – along with legislation that includes tax cuts for small business and funding to help community banks made loans to small companies.

Bernanke acknowledged that banks have become more conservative with lending standards.

"But, though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness," Bernanke said, "it seems clear that some creditworthy businesses — including some whose collateral has lost value but whose cash flows remain strong — have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating." (As the New York Times reported, the Fed chairman underscored the particular needs of start-up companies, which, he noted, play a disproportionate role in job creation. For our 16-point plan on how to support start-up companies, see Inc.'s July-August cover story.)

Even when banks do make loans to entrepreneurs, the cost of capital has risen sharply. Fed data for May on small commercial and industrial loans ($100,000 to $999,000) show that borrowers are paying an average of 3.5 percent more than the federal funds rate, the largest spread since the reports first were issued in 1986.

Bernanke said the Fed had started training its regulators in small-business lending.

"We take this issue very seriously," Bernanke said. "Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers. Doing so is good for the borrower, good for the lender and good for our economy."

Last updated: Jul 13, 2010

COURTNEY RUBIN

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.




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