In a previous article, mention was made of the new Obama Administration's loan initiative. Imagine that: someone finally realizing that small businesses are the backbone of our economy. It will be creating a Small Business Lending Fund with the $30 billion just received from the large banks under TARP. These monies would be loaned to community banks who are seriously interested in making small business loans. It sounds like someone is finally listening to the plight suffered by our small businesses. Here are more details.
1. Banks with less than 1 billion in assets would be eligible to receive capital investments up to 5% of their risk waited assets. Banks with between 1 and 10 billion in assets would be eligible to receive up to 3% of risk waited assets. TRANSLATION: "risk waited assets" are outstanding loans.
2. The dividend rate, or the interest rate being charged to the banks for receipt of the Federal funds, it would begin at 5%, but with reductions as low as 1% if the bank shows an increase in small business lending relative to a baseline set in 2009. Banks would receive a 1% decrease in their dividend rate for every 2.5% increase in lending TRANSLATION: the more they lend the cheaper it is to receive funds.
You do not have to have a Ph.D. in economics to realize giving money away with no strings attached will not encourage lending. The flood gates were opened in the Fall of 2008 for this purpose, but nothing happened. The banks sat on the Federal bailout monies and nothing trickled down. Washington has finally gotten smarter. First, it will only give money to banks who are serious about lending, none other than smaller community banks. Second, it is dangling a sweet carrot, namely the more you loan the less interest paid to the government. Using the good ol' fashioned desire to make a profit.
Only time will tell if this program is successful. But while we wait as the economy struggles, there are lenders who are actually serious about lending, but have not received bailout monies. They use a program called SBA Community Express, which makes small cash flow loans of between $5,000 and $25,000 at the low unsecured interest rate of 7.75%. At least someone is getting the message.
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