Obama’s Plan to Aid Small Businesses

Barack ObamaThe Obama administration said Monday that it will inject $15 billion into small businesses by buying up securities that are linked to small business loans.

The program is the latest part of a broad package aimed at boosting the credit available to struggling small business owners.

“The Obama Administration firmly believes that economic recovery will be driven in large part by America’s small businesses, which have generated about 70 percent of net new jobs annually over the past decade,” the White House said in a news release that announced the new initiatives. “But as the flow of credit has dried up during this recession, small business owners who were prudent and responsible have been set back by the behavior of others in our financial system who were not.”

The measures include $730 million from the stimulus plan to immediately reduce small-business lending fees and to increase the government guarantee on some Small Business Administration loans to 90 percent. The government also is taking aggressive steps to boost bank liquidity with up to $15 billion aimed at unfreezing the secondary credit market.

Often primary bank lenders will seek to sell the Small Business Administration loans in the secondary market, allowing them to use the proceeds of the sale to make new loans to other small business owners, but skittish investors have been staying away. Under the administration’s initiative, the government will step in to buy these loans to help unlock the frozen credit market, using money from the recently passed bailout package in the range of $10 billion to $20 billion, an administration official briefed on the plan told The Associated Press.

“Businesses with strong credit histories have seen loan applications denied due to conditions that have nothing to do with their own actions and are now struggling to expand their businesses, make their payments or even keep workers on their payrolls,” the White statement said. “As a result, while the U.S. Small Business Administration (SBA) typically guarantees about $20 billion in loans annually, new lending is trending below $10 billion this year.”

Beginning this month the Treasury Department will begin making direct purchases of securities backed by loans guaranteed by the Small Business Administration, and would purchase new securities, the news release said. Even small businesses with good credit histories have seen lending dry up.