The Small Business Jobs Act set aside a $30 billion fund designed for smaller banks to lend to small business owners when it passed last September.

Almost one year later, very little money has been dispersed by the Treasury Department, and only about one third of the total funds available to the banks have been requested at all.

There were more than 7,500 banks that were eligible, but the Treasury received just 869 applications seeking about $11.6 billion in total.

In the first wave of funding only six banks received a total of $123 million. In the recent second round 17 banks received $214 million.

In contrast, the Small Business Administration had been very successful in helping to jump-start the economic recovery for America's small businesses. Up until its March 28, 2011 deadline, the agency had offered funding enhanced by special provisions of the American Recovery and Reinvestment Act that included a higher guarantee (90 percent instead of just 75 percent) of SBA-backed loans and a waiver of the loan fees normally paid by borrowers.

The increased guarantee and reduced fees on SBA loans helped put nearly $22 billion into the hands of small business owners and brought more than 1,100 lenders into SBA loan programs, according to Karen Mills, the SBA administrator.

The Small Business Lending Fund is not nearly as successful. Why has it been a failure?

Tarp stigma: Banks feared that by accepting the money, it would give the impression that they were in trouble. Although this was not the case, perception is very important in the banking industry.

Too many strings: Bankers are weary of the strings that come attached to taking money from the government. They don't want to do the mountain of paperwork involved.

Repayment irregularities: Banks that participate in the fund must repay the loans at varying rates of interest (between 1 and 5 percent). Banks that increase the number of loans they make by 10 percent or more will see the repayment rates drop to as little as 1 percent. However, banks that up their lending by less than 10 percent will repay at rates between 2 and 4 percent. Additionally, if a bank's small-business lending does not increase in the first two years, the rate would jump to 7 percent and then 9 percent after 4 1/2 years (if the bank has not repaid its debts). These rates are less than attractive for the smaller banks.

It takes the government forever to put things in motion: Treasury Secretary Tim Geithner chalked the slow pace up to being careful and building in safeguards that require each application to be reviewed by a bank's primary supervisor and then again by the Treasury. Due diligence is important, but the program is being instituted at a snail's pace.

Some analysts believe that demand for small business loans is weak. However, if you ask small business lenders, they will tell you that demand is there. The problem is that the banks are becoming more stringent in their lending parameters at a time when small business revenues have stagnated.

Are there better options than the Small Business Lending Fund?


First, renew the 90 percent loan guarantees of SBA loans. Secondly, waive the fees. Third, restore the money cut out from the SBA budget earlier this year with money from the lending pool. The SBA has been very effective; cutting its budget and instituting a new lending program was not the most efficient way to spur lending.

There was no need to institute a whole new program when we know what is already working.

Rohit Arora is the chief executive of Biz2Credit, which connects small business owners with a network of lenders, credit rating agencies and service providers.