“We decided to be very bold in getting money out into the hands of small business as quickly as possible. As a result, tens of thousands of businesses were able to get credit in a market where the banks had really frozen them out,” says Ms. Karen Mills (Small Business Administration chief)
Small businesses play a vital role in the economic growth because they are the backbone of the U.S. economy. With the recent economic downturn, the small businesses are struggling to get business loans. Reason being: many banks have filed for bankruptcy in the period 2008-2009; the banks may have bad/troubled loans; the small businesses may have poor credit history. When the economy is facing a crisis and the future of your business looks bleak because lending institutions are denying you loans, you need to take certain steps to obtain small business loan.
The American Jobs Act 2011 has impact on small businesses. If the businesses induct recruits or increase the salary of the existing staff, they get tax deduction. However, small business owners still feel the pinch because many of the loans are for the big businesses. The recent survey conducted by the Federal Reserve on lending institutions reported that 30 out of 57 banks have eased their credit standards or loan terms.
When banks such as JPMorgan Chase, Columbia Bank, Cathay Bank, and Wells Fargo have become tight fisted, many local lending institutions such as Sterling Bank are ready to fund the small business even when the loan applicants do not meet the ‘traditional standard’. The out-of-the-box thinking and their urge to give back to the nation, at a time of economic-financial crisis, are the major factors behind their lending spree.
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Small Business Lending Fund
Small Business Lending Fund (SBLF) is a government institution that encourages and supports community banks to provide loans to local small business owners. As a part of the Small Business Jobs Act of 2010, the SBLF will support the community banks with assets less than $10 billion to lend to small/medium businesses. By purchasing Tier 1-qualifying preferred stock or equivalent, in each participating bank, the U.S. Department of Treasury will provide banks with capital.
SBLF will lend financial support to the participating community banks at a nominal rate of interest. The banks in turn will lend to small business owners. This will generate new jobs in society and enhance economic growth across the nation. The banks need to pay a low rate of interest on the SBLF funding if they increase their rate of lending to local small businesses.
The initial rate of interest that the banks have to pay the SBLF is 5% and when the bank’s lending increase to 10%, they need to pay only 1% as a dividend rate. Within the first two years, if the banks cannot increase their lending rates to 10%, then they have to pay an interest rate of 7% to the SBLF. Beyond two years, the banks will have to repay the loan amount borrowed from the SBLF at the rate of 9%.
The Small Business Administration reports that the volume of small business loans is up by more than 25%. In spite of the economic-financial crisis, the small banks survived because their main business is to lend to small businesses. Therefore, the current situation for them is more or less like any business day. The bottom line is, a couple of year’s back the federal government spent the taxpayer’s dollars to bail out the banking system. Now it is their turn to return the favor to create more new jobs and revive the economy. This is what the President expects from the financial community.