Small businesses continue to feel the credit crunch: one-third say it is harder to get credit today than it was a year ago, and about 70% are worried about their ability to access financing in 2011, according to a recent Greenwich Associates survey. Contributing to their concern, surely, is the fact that many community banks remain undercapitalized.
Enter the Small Business Jobs Act of 2010, signed into law last September. The legislation directs the Treasury Department to bolster the capital levels of community banks with as much as $30 billion in order to spur small-business lending. Financial institutions that qualify (the program is voluntary) will issue preferred stock to Treasury, and the funds will count as tier-1 capital.
Will the program get more money into the hands of small-business borrowers? On the plus side, capital from the so-called Small Business Lending Fund (SBLF) program will be low-cost: initially, banks will pay only a 5% dividend on the preferred stock. A community bank would be lucky to get capital in the private markets at even double that rate, says Paul Merski, chief economist of the Independent Community Bankers of America. In theory, banks could leverage the SBLF capital by as much as 10 to 1. As the economy improves and small businesses look to borrow, the SBLF could get credit flowing again, says Merski.
But some banking groups are not happy about certain terms of the law (lenders must prove small-business-loan growth in the first two years to qualify for lower rates, and Small Business Administration loans that a bank originates will only partially count toward the tally of a bank's small-business loan portfolio).
The Troubled Asset Relief Program has also left banks leery of federal help. Treasury has tried to head off those concerns by, among other measures, not imposing restrictions on bankers' executive compensation or requiring the issuance of warrants. But worries about the overall cost and complexity of participating leave some banks questioning the value, and that may leave many smaller companies wondering whether their capital concerns will ease this year.