Opinion: New small business loan still needs to work out kinks

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Four months after its enactment, the economic stimulus bill that Congress passed in February is drawing fire for not injecting money into the economy as quickly as promised. One illustration is a Small Business Administration loan program funded by the bill that finally launched this week, providing a trickle of help to struggling small business. The government is presenting the program as a win-win situation for the small companies (and itself, of course), but lenders simply don’t see the incentives.

Small businesses, which collectively employ more people than large and mid-sized companies, are being hit hard in this recession. The America’s Recovery Capital Loan Program -- interest-free loans of up to $35,000 to qualifying businesses – is SBA’s answer to its constituents’ growing hardship. Private banks make the loans but the government guarantees them, minimizing risk for the banks. Win-win, right? Not exactly. The program didn’t start until June 15, and the reception from lenders was cool.For example, spokesmen for two Los Angeles area banks -- one large, one small -- expressed reservations about the program because they didn’t know enough about how it would work, who would benefit and how the lenders would make any money from it.

So far, most Southern California banks that are also SBA lenders have either not signed on or put a cap on the number of loans they will provide. Both the smaller Gilmore Bank that serves Los Angeles and California giant Bank of the West told me yesterday that they’re still exploring their options, including tacking on their own addenda to the SBA’s guidelines, and therefore haven’t yet agreed to participate.

Christopher Lorenzana, the public information officer for the SBA’s Santa Ana District Office, said 10 out of about 125 lending banks in the Santa Ana district have contacted the office about the program, and the office has been conducting web chats and teleconferences to provide participating lenders with more information. The SBA seems to have taken the necessary precautions to make sure the loans go to businesses with the financial wherewithal to survive the downturn. And it has made it clear that the money can be used only to lighten a company’s debt load. But because borrowers don’t have to make payments on the loans for a year, lenders have to front the cost while getting little in return from Uncle Sam.

To compensate the lenders in the program, the SBA will pay interest on the loans they issue -- but at a rate that’s much less than what banks usually charge. As a result, banks are being offered next to nothing by the government to make what most lenders regard as puny loans. SBA lenders want bigger loans that make banks more money, and a higher interest rate.The SBA is dangling a few carrots in front of lenders, but it doesn’t seem to be enough to persuade them there’s a benefit for more than just the borrowers and Washington.

--Catherine Lyons