Not enough good borrowers for small business loans

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More and more small businesses are shuttering their doors -- but not for lack of credit. Image: Flickr/alancleaver_2000

A bill designed to help smaller banks make more loans to small businesses is about to be voted on by the U.S. Senate. This bill will help create $300 billion in available capital to help small businesses. Banks in the lending business, though, are saying the extra quick cash advance won’t actually create more small business loans. The concern is that it doesn’t matter how many short term loans are available, there simply are not enough credit-worthy small businesses.

Small business loan program

The U.S. Senate is set to vote this week on a bill that will send $30 billion to community banks. That money is intended to create $300 billion in small business loans. This emergency loan is intended to increase the available credit for small businesses and create jobs. The money would be available for banks with assets of less than $10 billion. The National Federation of Independent Business and American Bankers Association both support the bill.

Lack of creditworthy small businesses

Many of the banks that are a target for this small business lending bill are saying it will not help. Banks do not want to let people with bad credit borrow money — that is what caused the problem in the first place. The highest demand for loans, especially for small businesses, is from borrowers who have bad credit. Without sales and profitability, businesses are very reluctant to take out loans.

High small business defaults

There are several indicators that say that small businesses are in need of more than just loans. The Small Business Administration reports a default rate of almost 7 percent already this year. Bank of America has reported that 14 percent of small business loans were charged off already this year. A credit card firm that specializes in small businesses ended up going into bankruptcy after more than 50 percent of its cards went into default in 2009.