economics

March 15, 2010

A Plea for Direct Lending to Companies Proposed Legislation Calls for the Small Business Administration to Take On an Added Role—Lender of Last Resort

This legislation calls for the Small Business Administration to help business owners find willing lenders and, as a last resort, issue the loan directly. While this provision passed a House vote in October, the direct-lending provision has an uncertain future as it awaits consideration from the Senate.

Mr. Gordon on Friday testified at a congressional hearing that addressed whether a recently announced $30 billion initiative from the Troubled Asset Relief Program, or TARP—originally proposed to help community banks make more loans to their neighborhood businesses—would be better spent by the SBA to lend directly. “I went as a messenger,” Mr. Gordon says. “They [should] not give banks another dime of money.”

“The more you look into [direct lending], the more you realize the challenges and consequences it presents. If businesses are being told ‘no’ because they are not creditworthy and lenders won’t make the loan with a 90% SBA guarantee, why should the taxpayers do it with a 100% guarantee?” says Jonathan Swain, an SBA representative, in a recent interview.

Ms. Velázquez, however, points to several indicators that show the momentum of the direct-lending proposal. Trade groups such as U.S. the Women’s Chamber of Commerce have called for such a program, and separate legislation with direct-lending provisions have recently popped up in both congressional chambers, she said.

SBA has attracted more than 1,000 banks and other lending partners to its guarantee programs in the past year. It fears that setting up a direct-lending system could foster competition between them and the government and could hinder small businesses from developing a solid relationship with a lender.

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