New Small Business Lending Bill – How It Works for Small Businesses

For those small business owners wondering whether the winds of change from Washington will ever affect you, there is finally good news. The Senate, in its infinite wisdom, on September 14th, by a vote of 61 to 37, passed a motion which had the effect of approving the Small Business Jobs and Credit Act of 2010 (also known as the Obama Small Business Loan Bill). Since September of 2008, small business owners have been driving by local banks and not even turning their heads. There was simply no reason. For all intents and purposes, lending came to a screeching halt. Now there is a chance that lending machine will be fired up again.To understand the significance and the benefit to small businesses, here is a description of how it works. In summary, the U.S. Treasury will loan up to $30 billion to smaller community banks at rates between 1% and 5%, and the money will in turn be loaned out to businesses after an interest write-up for reasonable profit. Presto–businesses can now make realistic applications for loans. Here is how it works under HR 5297:1) Security for the loans from the Feds to the Banks. The Feds will not just hand out the money, but instead will require some reasonable security. Under section 103 (b), the bank will have to give up either preferred stock (stock with no voting rights) or issue a promissory note as a debt that will have to be repaid at a certain interest rate.2) How the Fed gets paid back. The Fed will receive either interest paid by the lender on a loan or dividends if there is preferred stock. Even better, the government can sell the promissory notes on the secondary market. This is almost as if the Feds are going into the lending business.3) Pays for itself. Well, at least that is the idea. This is because of the bad press from TARP I which was basically a giveaway program without strings. The idea is the interest and dividends will pay back the money advanced by the US Treasury. We will have to see about that.4) Bank lending plan. Under Section 103(d)(1)(E), each participating lender must submit a “Small Business Lending Plan”. This will describe how it will lend out the money and most importantly, have an outreach program where people are informed of the loans and how to apply.5) Lender websites. As to lenders which have web sites (and they all do), they must indicate they are a participant in the program and they are “seeking to make small business loans to qualified businesses”. In other words, get the word out.6) Lender quarterly reports. Each lender must issue a quarterly report of the number of loans made so their credibility can be tracked.It has been a long time coming. Hopefully, this will open the floodgates of capital again to small businesses which are primarily responsible for driving our economy.