The Small Business Lending Fund and State Small Business Credit Initiative Gain Funds

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Fifty community banks, from Alma Bank in Astoria, New York to Veritas Holdings, Inc. in Dallas, Texas, received nearly three-quarters of a billion dollars in late August as part of the Small Business Lending Fund (SBLF), the U.S. Treasury Department announced. The latest announcement brings the total funding made available through the SBLF to about $1.8 billion, the Treasury reports.

The SBLF provides capital to banks with less than $10 billion in assets. Through the program, the dividend a bank pays for funds from Uncle Sam declines as it makes more loans to small businesses. The idea is that this will encourage banks to increase their lending.

Earlier in August, the Treasury also announced the approval of applications for State Small Business Credit Initiative (SSBCI) funding. The applications came from eleven states: Alabama, Florida, Idaho, Iowa, Louisiana, Mississippi, Ohio, Oregon, Tennessee, Texas and Virginia, and the District of Columbia.

Under the SSBCI program, states can apply for federal funds to be used in state-run programs that link with private lenders to increase the amount of credit available to small businesses. However, the states have to demonstrate a reasonable expectation that each dollar in federal funding will generate at least $10 in new private lending. The program has been funded to the tune of $1.5 billion.

According to the Treasury's explanation of the SSBCI, "...participating states will use the federal funds for programs that leverage private lending to help finance small businesses and manufacturers that are creditworthy, but are not getting the loans they need to expand and create jobs.

To be sure, while a lack of credit has often been cited as a primary reason small businesses have struggled over the past few years, it's unclear that that's really the case, as I mentioned in this post last month.

As early as February, the National Federation of Independent Businesses was finding that weak sales were causing a drop in demand for credit. A survey of NFIB members revealed that 48 percent of small businesses tried to get credit in 2010, versus 55 percent in 2009. What's more, the business owners who tried to get credit were more successful: 60 percent of small businesses that applied for a loan, credit line, or credit card in 2010 got all or most of the credit they wanted, compared with 50 percent in 2009.

On the other hand, another study on small business lending reached a different conclusion. The study, "Small Business Lending in the United States, 2009-2010," by the Small Business Administration, also found that the level of small business loans outstanding dropped by 6.2 percent between 2009 and 2010. However, in looking at the declining ratios of small business loans to total lender assets -- the total assets ratio -- and of small business loans to total business loans -- the total business loan ratio (down by 3.5 and 1.5 percent, respectively) the researchers concluded "that small business borrowers continued to be less successful in competing for funds over the past year."

Even so, it's not clear how effective these programs are likely to be. Looking at the data overall, businesses appear most in need of sales. While credit is critical, of course, demand comes first.

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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