All About Small Business: Borrowing Surge, Lending Fund, and Obama Administration Efforts

How many times have you heard the saying that small business is the growth engine of our economy - that small businesses create nearly 80% of the new jobs? They innovate, they invent, they advance the economy towards the next big thing. So among indicators predicting stronger growth in the second half of this year, perhaps none were more significant than the fact that in May, small business borrowing surged to its highest level since before the financial industry collapse in 2008.
Borrowing by U.S. small businesses is at its highest since July of 2008, two months before the collapse of Lehman Brothers, says the Thomson Reuters/PayNet Small Business Lending Index, which measures the volume of small business financing.[...]

The index was up 26 percent in May compared to the year before.

"If small businesses are taking these kinds of chances, taking risks, making long terms investments, they are seeing some long-term opportunities on the horizon," PayNet founder Bill Phelan told Reuters. "That's got to be a big positive sign for the economy."
MSNBC reported that small businesses are also becoming lower risks for financial institutions, as small business loan defaults fell to their 5-year low in May. The borrowing surge is not being aided by big banks, mind you. Their lending to small businesses, of all things, is down. So who's stepping up? Community banks.

Speaking of community banks, some of you may remember that in 2010, before the elections, one of the last bills the President and the Democratic Congress was able to get passed was the Small Business Jobs Act, approving a $30 billion lending program through community banks and $12 billion in small business tax cuts, mostly by speeding up tax write offs (like by letting companies take write off entire amounts of purchases now rather than over a extended "depreciation" period). The bill was able to gather a grand total of three Republican votes - one in the House and two in the Senate.

The good news from the Small Business Jobs Act on the heels of cranked up small business borrowing is that the lending market is probably likely to open up a bit more now that over $11 billion of the loan guarantees provided for in the Small Business Jobs Act has been approved and has begun to be disbursed. We should note that these loan guarantees are provided to community banks with assets less than $10 billion to provide to businesses with annual revenue of less than $50 million. The greater a bank expands the lending, the smaller their interest rates are for SBA guarantees. So small and medium size community banks and domestic businesses will benefit, but this is not for the types of banks and businesses that typically sit on top of trillions in cash. Yes, these small business loan guarantees have taken more time than would be desired to start getting on their way, but these loans are making differences in small footprints in communities across America - from Las Vegas, NV to Austin, TX to Bathesda, MD.

The Obama Administration has consistently supported and pushed for small business financing, from the Recovery Act to the Troubled Asset Relief Program (yes, TARP) to the Small Business Jobs Act. At a time when potential borrowers are at the end of a rope on collaterals (with home values down and home equity lines of credit shut off), the Obama administration has come to the rescue with something known as the SBA Direct Loans - loans guaranteed by the SBA, and available only with the baseline qualifications of SBA loans, rather than the additional burden banks tend to put on.
Unfortunately for small business owners -- even ones who KNOW about SBA-guaranteed loans -- bankers are not often the best lenders of SBA-secured loans, according to SBA loan expert Mike Robbins, founder of SBAdirectloans.com.

Banks will often have lending guidelines they overlay on top of the SBA requirements. So an entrepreneur looking for SBA-funding may be denied by a bank even though he would otherwise qualify for an SBA-guaranteed loan.

Does the entrepreneur have a choice? Yes, he or she can contact an SBA-lending specialist who is not limited by a single bank's SBA-lending overlays. [...]

An SBA lending expert can identify SBA-guaranteed funds that are not subject to these additional bank restrictions.
While the lending market still remains tight, thanks to the efforts of the SBA under President Obama, loans are available to small businesses who take innovative approaches in a difficult economy.
Within the city of Chattanooga for the 2011 fiscal year, which started in on Oct. 1, 2010, and goes through May 31, 2011, the Small Business Administration has helped make 24 loans totaling $16.6 million, [Tennessee District Director for the SBA Walter] Perry said.

Of those loans, 63 percent were for existing businesses and 38 percent were for new businesses, he also said.

“Yes, it is possible to get a loan,” Perry said. “If you look at our statewide lending numbers, this year versus last year, the number of loans is up. The dollar value is up.”
Community bank reports are showing this trend too.
According to Cornerstone Community Bank’s 2009 annual report, the great recession — which officially lasted from December 2007 to June 2009 — hurt the lender and created an urge to shrink the banks’ loan exposure.

The 2010 report painted a brighter picture.

“Cornerstone has built its loan loss allowance to $9.1 million which, when combined with recoveries, will most likely satisfy all of the loan loss provision requirement for 2011," President Frank Hughes said in the report. “This is a very positive indicator for 2011 earnings and management believes that Cornerstone will have positive earnings for 2011.”
When community banks move from losses to profits, they lend more to local businesses, and that means these businesses can innovate, purchase equipment and create jobs. Do the positive numbers mean that worry for small business is over and good times are ready to roll? No. But they do add to a string of economic indicators that are going back to their pre-collapse levels, and the surge in small business borrowing in particular indicates a likely jumpstart of business-to-business spending in equipment and services, as well as a somewhat improved job market.

We have known from day one that the recovery from the worst economic and financial disaster since the Great Depression would be neither quick nor painless. If we are to move beyond cycles of booms and busts that ultimately result in a crash of epic proportions, as happened in 2007 and 2008, then the rebuilding has to be on a stronger ground. And building a stronger ground takes time. Sure, one can sit on the sidelines and complain that not every process and step in the recovery has been optimal or optimally efficient, or things could be done better this way or that way. But at the end of the day, indicators point at a slowly but surely emerging economic recovery with the right elements - small businesses, community banks, consumer protection, investor protection and a regulatory overhaul - in charge.

Let's also remember that the path of helping small business hasn't exactly been easy for the President. While the Obama administration has spent every waking moment trying to find financing for and make it easier to do business for small business, Republicans have been busy protecting big oil tax giveaways and supporting multinational conglomerates.