Small-business loans a good public-private partnership - make it better

Bill Knight column for Mon., Tues. or Wed., Nov. 11, 12 or 13

It’s sort of sad when competence is newsworthy, but a public-private partnership benefiting small businesses has been a relatively quiet success. However, the thriving cooperative venture between the federal government, community banks and small business can still be improved.

Small-business lending is up $10.4 billion over comparable levels since the Great Recession, the Treasury Department says in a report to Congress – $1.4 billion more than the previous quarter. That’s 48,600 more loans, according to Treasury, which coordinates the Small Business Lending Fund (SBLF) program.

The total is the first increase of more than $10 billion, Treasury said.

“Crossing the $10 billion mark in increased small-business lending is an important milestone for these community banks, and underscores the positive impact that this Treasury program continues to have in local economies across the country,” said Treasury Under Secretary for Domestic Finance Mary J. Miller. “By improving access to capital that small businesses need to grow and hire, the Obama Administration’s Small Business Lending Fund is helping to fuel the economic recovery across America.”

In Illinois, the SBLF lending has meant an increase of $464.8 million over baseline levels, with $107.8 million in the 2nd quarter this year alone.

However, just 20 Illinois banks have taken part, a disappointing participation rate some local bankers attribute to fewer businesses, the complexity of requirements and the sheer volume of paperwork involved.

One veteran small-town banker said that some areas just don’t have the potential market –the small-business borrowers who’d benefit from SBLF. Also some community banks are not “certified” to specialize in such lending, and experienced specialists in small-business lending can participate much more easily in SBLF.

Established by the Small Business Jobs Act of 2010, the dedicated SBLF encourages community banks to increase their lending to small businesses, helping such companies expand operations and create new jobs. Treasury invested more than $4 billion in 332 institutions through the SBLF. Collectively, these institutions operate in more than 3,000 locations in 48 states.

Treasury’s report said 315 institutions continued to participate in SBLF as of July 31, including 265 community banks and 50 Community Development Loan Funds (CDLFs).

Receiving the infusion of capital are “community banks,” which Treasury’s report defines as banks, thrifts, and bank and thrift holding companies with consolidated assets of less than $10 billion.

An underlying achievement of the SBLF is to encourage Main Street banks and small businesses to work together, help create jobs, and promote economic growth in communities across the nation, said Treasury, which noted that the breakdown of the money made available to communities was $3.9 billion for 281 community banks and $104 million for 51 CDLFs.

For community banks, the SBLF program is set up to help small-business lending through a dividend or interest-rate incentive. The initial rate payable on SBLF capital is less than 5 percent, and the rate falls to just 1 percent if a bank’s small-business lending increases by 10 percent or more. For CDLFs, the SBLF program is structured to encourage small-business lending through access to low-cost capital at a 2 percent interest rate. These non-profit loan funds play a critical role in distressed communities, Treasury says

The 20 Illinois community banks taking part included five in greater Chicagoland and 15 downstate, in communities including Bloomington, Champaign, Moline, Quincy and Springfield.

Despite that participation level in the state, SBLF banks nationwide have stepped up small-business loans by a median (midpoint) of 48.2 percent over comparable institutions, which reported an increase of 10.3 percent.

SBLF banks that refinanced Capital Purchase Program (CPP) funding have increased business lending by a median of 43.7 percent since their initial receipt of CPP funding from Treasury versus a 15.9 percent increase for the peer group and a 9.6 percent increase for the comparison group over the same period.

The report compared SBLF banks relative to a representative peer group of 510 community banks that were selected to match the specific size, geography and financial condition of SBLF banks, and also a broader comparison group of the 6,090 similarly-sized community banks that are headquartered in the same states as SBLF banks.

Increases in small-business lending are widespread across SBLF participants, with 92 percent of participants having increased their small-business lending over baseline levels. Most participants report that their small-business lending increases have been substantial, with 86 percent increasing small-business lending by 10 percent or more.

Nevertheless, apart from successes, some reform makes sense. Either Treasury in its rules or Congress by statute should further facilitate the program by streamlining the process for applicants and community banks alike.

That’d be more good news.