A comeback for a crisis-era small business loan program?
As policymakers search for ways to pull the U.S. economy out of a tailspin caused by the new coronavirus outbreak, some industry observers are suggesting that they dust off a program created during the financial crisis that helped prop up many struggling small businesses.
The Small Business Lending Fund was formed in 2010 and run by the Treasury Department with $30 billion to give community banks a cheap source of capital that was then used to make loans to small businesses. The dividend these banks paid for the funding was lowered as they offered more loans.
More than 300 banks participated in the program, drawing about $4 billion and funneling a total of $19.1 billion in qualified loans to small businesses as of the third quarter of 2019, according to the most recent Treasury report. The bulk of the loans were made from 2011 to 2015 and all but four banks have repaid the capital they received and exited the program.
Industry officials point out the program was designed for a crippled banking system and not a public health crisis. One potential shortcoming is that it could take time for community banks to go through the process of writing loans to small business owners facing an unprecedented drop off in business that could potentially last for months.
But banks are eager for any ready-made program that has proven effective in the past.
Banks with less than $10 billion in assets qualified for the first version of the program. They were initially charged a rate of 5% for the capital they received from the Treasury, which fell to 1% if the bank increased its small-business lending by 10% or more.
If banks held onto the capital for too long and did not repay it after four-and-a-half years, the rate jumped to 9%
The SBLF program is “a great arrow in a quiver,” said Stephen Scurlock, director of government relations and public policy at the Independent Bankers Association of Texas.
The Federal Reserve is looking for any way to keep credit flowing. The Small Business Administration is scrambling to send emergency funds to prevent mass layoffs as banks are lining up to help the agency. Lawmakers are haggling over a $2 trillion stimulus package that’s including direct payments to individuals and small-business owners after a version failed to move forward in the Senate Sunday.
Chris Marinac, the director of research at Janney Montgomery Scott, said the idea of rebooting the SBLF program has been floated in recent days to complement any other programs the government puts in place.
About $4 billion of the original $30 billion was spent, according to the Treasury reports. But Marinac said that demand would be so great this time, a new version of the program would likely need even more than $30 billion this time around.
“The banking system really needs multiple workarounds or emergency solutions,” Marinac said. “A lot of banks don’t know what to do at this juncture. They have loans to hotels, they have borrowers at restaurants and small businesses who are laying people off because they work paycheck to paycheck.”
The Treasury was criticized last time for how slowly it rolled out the program. The first loan wasn’t made until the summer of 2011. The delay was caused as Treasury officials worked on the investment decision process, according to a 2018 study from the Congressional Research Service. Banking regulators at time agreed to advise the Treasury on the viability of banks that received funding from SBLF insteading of making specific investment recommendations as they did for the bigger Troubled Asset Relief Program, according to the CRS report.
There were also hang-ups crafting SBLF regulations to account for the different structures of community banks and community development financial institutions, or CDFIs, when selecting which ones would participate.
The original SBLF fund was designed to help businesses ramp back up following a prolonged downturn, and Paul Merski, group executive vice president of congressional relations and strategy at the Independent Community Bankers Association, said it could serve a similar purpose this time around.
“This program could be valuable to pick the economy back up when the demand is increasing,” Merski said.