Weak small business lending could slow recovery

[May 13, 2010]  WASHINGTON (AP) -- The Treasury Department's programs to ease credit for small businesses have not provided the lending necessary to help many businesses grow and create jobs, a new watchdog report says.

Treasury has rolled out a series of multibillion dollar plans that were supposed to help small businesses get loans, but many companies still face failure because they can't get loans, says the report, which was issued Thursday by the Congressional Oversight Panel.

"It is not clear that any of the ... programs in place to date (have) had a noticeable impact on small business lending," the report says. It says many of the programs do not apply to the small banks that lend disproportionately to small businesses.

Small businesses are critical to the nascent economic recovery. Companies with fewer than 500 employees have created 60 to 80 percent of new jobs since the mid-90s, the report says.

The Congressional Oversight Panel was created by Congress to oversee the $700 billion financial bailout passed at the height of the financial crisis. To fulfill the bailout's goal of promoting growth and creating jobs, the report says, small businesses must have access to credit.

"If credit is unavailable, small businesses may be unable to meet current business demands or take advantage of opportunities for growth, potentially choking of any incipient economic recovery," the report says.

The value of banks' outstanding small business loans fell 9 percent between 2008 and 2009, the report says. That's more than double the 4.1 percent decline for overall lending.

That places unusual pressure on small businesses, which can't raise money through other means such as bond markets like their larger counterparts, said panel chair Elizabeth Warren.

"Many small businesses face a bleak landscape with the economy in deep pain," Warren said in a call with reporters. "Many have had to shut their doors, and many survivors are still struggling to find credit."

The report praises an Obama administration proposal to reroute $30 billion from the financial bailout to community banks. The program would have incentives for banks that increase lending to small businesses and would be more costly for those that do not.

Yet it could take months for the program to win congressional approval and get started, Warren said.

She said it is difficult to gauge the effect of the various bailout programs on small business lending because Treasury did not require banks to say how they were using the money they received.

"Without good data, policy makers are flying blind," she said. "It is virtually impossible to get a clear assessment of these programs when we can't collect good numbers."

A top adviser to Treasury Secretary Timothy Geithner said the administration has made a set of proposals that will restore credit to small businesses so they can participate in the economic recovery. Among the programs: the new fund for community banks, more support for Small Business Administration loans, and grants to state programs that lend to small businesses.

"We need to attack the challenges to small businesses on all fronts," Geithner counselor Gene Sperling said in an interview. He said the Treasury agrees with the watchdog panel that tight credit for small businesses could hinder the recovery.

"By giving more firepower to existing state initiatives and by putting forward this new small business lending fund, we're trying to address the remaining credit squeeze," Sperling said.

[Associated Press; By DANIEL WAGNER]

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.