Loans Expert

The Obama administration’s proposed Small Business Lending Fund looks attractive to local bankers.

They can’t help but wonder, however, if the plan’s beauty is more than skin deep.

The program, outlined by President Barack Obama on Tuesday, would utilize $30 billion of remaining Troubled Asset Relief Program (TARP) funds and make it available to banks with assets of less than $10 billion. Those banks account for 50 percent of small business loans nationwide.

Community banks would be eligible for capital infusions of up to 5 percent of their assets through the proposed program. That equates to about $2 million for Savannah’s smallest community bank in terms of assets, Carver State Bank, and $38 million for the city’s largest community bank, The Savannah Bank. Banks can then lend from eight to 10 times that amount.

And the more of that money those banks lend to small businesses, the lower the repayment rate. A bank that increases its small business lending by 10 percent, for example, would see its rate drop to as low as 1 percent for a five-year period. Loans currently backed by the government’s Small Business Administration carry rates above the 5 percent mark.

“It (is) tough for banks to expand lending without new capital,” said Brian Foster, whose First Chatham Bank ranks among the most active in the country in SBA lending. “Since we are a large small business lender, if we qualified for capital with a lower dividend rate, we would have to look at it.”

The look would be a hard one, however, given TARP’s lessons. That program’s restrictions, highlighted by greater government oversight, and the stigma attached to a so-called “bank bailout” sunk a similar proposal aimed at small banks last fall.

Among the more undesirable elements of TARP loans, at least from a bank’s perspective, was something known as warrants. A warrant is an option to buy shares of a company’s common stock at a fixed price at any point over a set period of time – 10 years in most cases.

Banks that accepted TARP money gave the federal government warrants in exchange. Banks could buy back their warrants only after repaying the TARP funds.

The Obama administration says Small Business Lending Fund banks would “not face TARP restrictions,” but the local bankers remain skeptical. The proposal is still in the early stages of debate in Congress and already is facing opposition.

“I certainly understand the intent and appreciate anybody’s efforts to get this economy going, and small business is the lifeblood of the economy,” The Coastal Bank’s Tom Wiley said. “But the devil is in the details. What are the strings?”

Another concern involves demand. Small businesses that want to borrow money through the program likely will have to meet another set of government qualifications.

“It’s hard to assess how many of qualified borrowers are out there,” Darby Bank CEO Ray Fisher said. “The banks may get the money and not be able to generate the percentage of loans necessary to get the reduced rate.”

Georgia Southern University’s resident banking expert, Ed Sibbald, has his own reservations but applauds the concept.

“It’s a long overdue alternative method of supporting community banks to make more loans to Main Street,” he said.

Related posts:

• Arizona small-business loans down
• US Treasury to Issue Loans to Lift Up Small Firms
• Obama Seeks More Small Business Loans for Low-Income Communities
• Banks expand small-business loans
• SBA offers disaster loans to businesses

Tags: Loan Programs, Loans