To Increase Small Business Loans, Revive What Has Already Worked

With the economy still struggling, there could not be a worse time to abandon a highly successful federal program that has created at least 650,000 private sector jobs throughout the country.

In 2009, and again in 2010, the federal government acted to increase lending to small businesses. The most effective elements of this legislation, according to Small Business Administration (SBA) data and a study by the nonpartisan Congressional Research Service, were an increase in federal guarantees for SBA loans to 90 percent (from 75-85 percent), the elimination of loan fees, and an increase in the ceiling for each loan from $2 million to $5 million.

Regrettably, however, the initiative ran out of money back in January, and there is no pending effort to fund it. We call on a bipartisan coalition in Washington to extend the program until December 31, 2012 and provide enough funding to allow the incentives to continue uninterrupted until then.

Based on the data for the average level of weekly loan activity when the incentives were in effect, we estimate that about $2 billion will be required to extend and expand the effort. This is less than one half of one percent of the $450-billion jobs bill the President proposed in September.

The effect of the previous funding was dramatic. Nationally, prior to the program's money running out, SBA loan demand soared at a dizzying pace. In the last three months that the funding was in place, the SBA did a record $12 billion in loan guarantees, representing a full 40 percent of the loan volume for Fiscal Year 2011 overall. This kind of activity is not surprising, given that the elimination of a 3.5 percent loan fee saves a small business or borrower a substantial $87,000 on a $2.5 million loan.

As just one example among the 50 states, Massachusetts set records for SBA loans for 2010 and 2011, with more than $355 million and $412 million loaned respectively in those fiscal years. According to The Boston Globe, just one lender, Eastern Bank, which is the largest issuer of SBA loans in New England, made 320 loans in Massachusetts that created or helped retain more than 1,800 jobs in the fiscal year ending September 30, 2010.

Small businesses are the cornerstone of the American economy. According to SBA data, they employ over half of all private sector employees. Additionally, nearly two-thirds of the new jobs created in the country have historically come from small businesses. Clearly, a strong small business sector is critical to a recovery from the current economic downturn and to our economic future.

In Massachusetts, we have taken our own steps to boost small businesses. The newly created Small Business Banking Partnership has already has moved more than $136 million in state reserve deposits into 31 community banks across the state, and it is on track to deposit a total of more than $250 million. This program is designed to deal with one particular aspect of the small business lending issue: putting money into the smaller local, community, and regional banks to encourage them to increase their market share of loans to credit-worthy small businesses.

The Partnership sets no conditions on loan terms, nor does it provide any loan guarantees. It was intentionally designed to avoid duplicating the SBA's programs. It is intended to complement SBA loans, and it can serve as a model for other states looking to jump-start their economies by encouraging loans to small businesses.

There is no doubt that persistent weakness in the overall economic climate has made businesspeople reluctant to expand or increase their indebtedness, thereby reducing loan demand. Nevertheless, there is a demand for credit, and a 90 percent federal guarantee dramatically changes the equation for both borrowers and the banks -- as amply proven by the speed with which loan demand spiked when the enhanced guarantees were available. Simply put, loan guarantees are the single most important factor in getting financial institutions to step up lending, often making the difference between a "yes" or a "no" on a loan application.

The loan incentive program worked brilliantly, and it will work again. In fact, there are hundreds of applications already in the SBA's pipeline for funding that can create urgently needed jobs right away. Washington should act -- and act now -- to provide another $2 billion to help small businesses, their workers, and the taxpayers.