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$30 Billion in New, Federal Small-Business Loan Money -- Will it Help?

Guest Writer
Owner of Make a Living Writing
min read
Opinions expressed by Entrepreneur contributors are their own.
30-billion-new-federal-money.jpg The Federal government has tried higher loan guarantees, pleas and threats, but small-business lending has remained anemic. Now, Congress is working on a more direct route to pumping cash into small-business lending -- a new bill that would see the Feds invest up to $30 billion in small, community banks. The idea is that the banks would then lend that money out to small businesses.

The question is, would it work?

The plan to create a Small Business Lending Fund cleared a key Senate hurdle at the end of last week, and the House already passed a version of the plan back in June. How it works: Banks with less than $10 billion in assets would get the money. In exchange, the federal government gets preferred stock in the banks which is to pay a 5 percent dividend.

I'm going to stop right there because hey -- is it me, or does that sound like a stealth plan to begin nationalizing the country's small banks? I'm a little troubled by the structure of this cash infusion. 

Also, why would the banks would take money they'd have to pay 5 dividends on to the Feds, when the current Fed funds rate is practically zero? This program could have the same problem as the original TARP stimulus program, where there was money available, but banks simply weren't interested to get involved.

The other problem with this cash injection is that like the stimulus programs this lending fund has been spun out from, the money comes with no requirement or accountability for lending it out. The small banks may well spend much of the cash covering their bad real-estate loans. 

Or they could use it to buy other, failing small banks seized by the FDIC. Or redecorate their offices. Whatever. There's no guarantee here that the money reaches small businesses.

Finally, providing a new loan pool doesn't change the fact that most small businesses have lost interest in getting a loan. The American Bankers Association recently noted that loan demand has fallen sharply. Just because there's money available to lend doesn't mean small businesses can qualify for a loan right now. Many have wrecked their credit trying to stay afloat through the past two years of recession.

What do you think -- does the Small Business Lending Fund offer a ray of hope in our bleak small-business lending climate? Or will it be just another federal boondoggle? Leave a comment and let us know.

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