Small Business

Take Our Free Money, Please!

Why Obama’s $30 billion small-business loan program has flopped.

What happened to Obama’s plan to help small businesses?

Photograph by Comstock/Thinkstock Images.

When the recovery started to flag in 2010, the Obama White House and Congressional Democrats attempted to pass a series of stimulus bills. A $150 billion, spending-heavy jobs package became $17.5 billion in tax cuts. Proposals for aid for the unemployed and the extension of Recovery Act programs faltered. But one bill that did pass was the Small Business Jobs Act, a law designed to funnel cheap money to small businesses.

The signature portion of the bill was the Small Business Lending Fund, a $30-billion pool of money for small banks meant to facilitate lending to small businesses. Little, local companies, the White House had long held, were the “engine” of the recovery and the creators of job growth. Help them, and you’d help the economy get back to growing.

Reading Treasury Department’s recent reports on the Small Business Lending Fund, you might think it had actually worked. “Billions of dollars in SBLF funds are now being put to use in communities all across the nation, spurring small business growth and job creation,” Deputy Secretary of the Treasury Neal Wolin said in a press release last month. The investment “is good for our economy and good for America’s small businesses.”

Treasury’s sunny spin aside, the program has largely flopped. It expired at the end of September having disbursed not $30 billion, or $15 billion, or even $5 billion. The SBLF is returning $26 billion to the government’s coffers. According to the Treasury Department, just 933 out of the country’s 7,700 or so community banks applied to the program. They requested just $12 billion in loans. And one-third of that sum got approved.

What happened? Well, first off, community banking organizations and small banks themselves argue that Treasury and the Federal Reserve made the program’s requirements too stringent and that they were too slow to get it off the ground. Treasury only started approving applications in early July, three months before the program’s expiration date.

The Independent Community Bankers of America lobbying group, for instance, sent repeated public letters to Treasury, asking it to clarify and loosen requirements and speed the application process. In September, with the program’s sunset in sight, it wrote: “[We] again implore Treasury and all the bank regulators to do everything in their power to ensure all SBLF applicants’ concerns are addressed … We urge Treasury to respond expeditiously to the community banks that still have questions and concerns … [W]e ask that Treasury take a hard second look.” In its defense, Treasury says that many of the community banks’ applications just did not pass muster: The banks could not prove they could make required dividend payments, or they already had missed a Treasury payment, or they were on a problem-bank list.

More troubling, the $4 billion in loans the government did make might not really help small businesses anyway. A Wall Street Journal analysis of Treasury data found that about half of the banks that took cash from the fund used some of it to pay back the Troubled Asset Relief Program. Rather than giving money to the restaurant around the corner or the startup in your neighbor’s garage, the banks gave it right back to Uncle Sam, bettering their balance sheets but doing little to spur business expansion or job growth. The Chamber of Commerce howled, branding the program little better than a bailout for small banks.

But there is another reason the program faltered—and might never have been able to succeed in the first place. Small businesses need credit to grow, to acquire equipment and hire workers to make sure more and more customers come in. But if small businesses don’t really believe that those customers are going to come in, well, they tend not to want to take on any debt. At some point, the problem isn’t a lack of credit. It’s an economy-wide lack of demand.

Have we hit that point? Almost certainly, and we’ve been there for years. According to the National Federation of Independent Business, the small business lobbying group, company owners routinely cite a lack of sales as the biggest problem for their business, more so than onerous regulatory requirements, high taxes, or trouble getting loans.

At a congressional hearing last week, Rep. Nydia Velazquez, D-N.Y., therefore argued that the whole program was misguided, “[wasting] today’s resources on yesterday’s problems.” In response, Treasury Secretary Timothy Geithner admitted, “We’re a little surprised by the take up” but maintained the program was “well targeted.”

In a way, they’re both right. Small businesses could use loans, and Treasury should be taking on risk and bending over backwards to make sure small banks are throwing free money at them. But that free money through the back door is no substitute for a flood of customers through your front door.