New Credit Initiative to Boost Lending to Small Businesses?

Posted by: Mark Marich on May 19, 2010 Source: Policy Dialogue on Entrepreneurship

The U.S. Treasury Department today unveiled a new credit initiative aimed at increasing lending to small businesses.  According to the Wall Street Journal, the initiative is expected to spur $20 billion in lending while being particularly beneficial to small minority-owned firms.

The new policy is modeled after 20 state-level initiatives known as capital access programs.  While the rules of the state level programs vary, these programs generally involve having borrowers, lenders and local economic development entities contributing a certain percentage to an investment fund, which is used as collateral to support loans issued to borrowers.

Some critics have expressed concerns that the lending fund employs a model that may have some of the same weaknesses as TARP's capital purchase program.  This program was created to inject capital into mid-size and large banks, with hopes of easing lending constraints but it remains to be seen whether the effort actually led to greater lending.  Additionally, Small Business Committee Chairwoman Nydia Velazquez (D., N.Y.) has expressed concerns that the program will be most beneficial to states that already have capital access programs.

If the initiative does deliver results, it may promote healthy relationships between local banks and small businesses while also helping minority and women-owned organizations that have struggled to obtain credit.  The potential results of the initiative are especially relevant in light of the recession, when job-creation is a key issue.

For the full article, see the Wall Street Journal.