Despite pressure from the Obama administration to pump up small business lending, the country’s biggest banks cut small business lending by $1 billion in November, according to a Treasury report released Jan. 15.

The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports, according to CNNMoney.com.

Bankers defend the cuts, saying small business loans are too risky and fewer entrepreneurs are seeking credit because of the recession.
But many small business owners say lending standards have grown more restrictive the past three years, and a report from the Federal Reserve backs that up, said CNNMoney.com.

Earnings at most big banks have turned around. JPMorgan, for example, reported earnings of $3.3 billion in the last quarter of 2009.

A number of politicians including the president have railed against bank executives for their unwillingness to free up credit while continuing to dole out huge employee bonuses.

Rep. Peter Welch, D-Vt., introduced a bill calling for a 50 percent tax on bonus compensation in excess of $50,000 at banks that received government bailout money. All revenue raised from the tax would go directly to the Small Business Administration to fund a new direct lending program, said CNNMoney.com.

At President Obama’s meeting with bank CEOs last week, he encouraged them to take a “third and fourth” look at small businesses that had previously been rejected for loans.

US Bancorp CEO Richard Davis said that his bank would be willing to take a second look at every loan it rejects and, as chairman of the Financial Services Roundtable, said he would present the idea to executives at other large banks.

But as John Tozzi points out on BusinessWeek.com , US Bancorp has been taking an automatic “second look” at rejected loans for quite some time.

US Bancorp spokesman Steve Dale told Tozzi that the bank looks for a way to adjust the loan conditions, but now, he said, “We’re going to try harder to say yes and we’re going to look for more ways to say yes.”

US Bancorp gets about 40,000 applications for small business loans each month, and Dale told Business Week the bank’s approval rate is between 40 and 50 percent.

Bank of America, Wells Fargo and American Express also said they have had second-look programs in place for a year or longer, according to the Wall Street Journal.

The banks told the Journal they’ve recently taken steps to ramp up the second-look process, including hiring new staff, widening application criteria and formalizing appeals programs. Bank of America pledged to increase small-business lending by $5 billion next year.

The Small Business Administration said on Nov. 23 that it has run through all of the $375 million Congress allocated to temporarily waive fees and boost SBA guarantees on small business loans, said CNNMoney.com.

SBA chief Karen Mills put out a statement two weeks ago cautioning banks that funds were low but believed the money would last through December.

Congress approved funds for the SBA through February 16, 2010. SBA officials would like to extend the lending program through that date, estimating it would need about $100 million, according to CreditDaily.com. The SBA says the program has resulted in more than 40,000 loans to small businesses.

The government is considering other programs to benefit small businesses. Earlier in the month, President Obama announced a plan to offer banks low-interest government loans in order to encourage lending to small businesses. With $200 billion left in the TARP bailout fund, Senate Democrats want some $40 billion spent on small business loans. And Goldman Sachs said recently that it would spend $500 million to help thousands of struggling small businesses.

Republican Sen. Olympia Snowe has introduced a bill to immediately end the American Recovery Capital loan program. The legislation would return $153 million in unspent ARC money to the Treasury.

The Maine senator says that the ARC program has been plagued by problems, most notably the high loan default rate.

New York Times financial blogger Robb Mandelbaum disagrees that the high default rate is the biggest problem with the ARC program. Mandelbaum writes:

“As Agenda readers know, the initiative has been flummoxed by its own design: Congress wrote the loan limits too small and the terms too generous for banks to profit from making the effort. Further, the impossible mandate of targeting struggling yet ‘viable’ businesses, coupled with Congress’s demand for rigorous accountability on stimulus spending … led inexorably to strict underwriting standards from the SBA Bankers, fearing they won’t be reimbursed for bad loans, have meanwhile adopted an even more cautious stance, disqualifying apparently worthy applicants.”

Snowe, the top-ranking Republican on the Small Business Committee, was a driving force behind the initial legislation, says Mandelbaum.

The House recently passed a bill that would extend the ARC loan program with a few tweaks, such as increasing loan limits and making the application process easier. It seems unlikely, however, that the bill will pass in the Senate.

Democrats, Republicans and the White House all have different ideas on how to spend $200 billion in leftover bailout money.

Senate Democrats want some $40 billion spent on small business loans, said Politico.com.

House Democrats, meanwhile, want to see the additional TARP money spent on various economic projects, such as job creation and homeowner loan programs, to hasten a recovery from the recession.

The Treasury Department wants to use the money to pay down the deficit and create an emergency reserve. Senate Republicans want the money returned to taxpayers.

Treasury Secretary Timothy Geithner told members of the Joint Economic Committee said the administration is eager to end the TARP program but said the country is still facing huge economic problems. “We are working to put TARP out of its misery, and no one will be happier than I am to see that program terminated,” Geithner said.

Alaska Sen. Mark Begich, one of more than two dozen Senate Democrats who support directing some TARP dollars toward loans for small businesses, said his constituents “saw the big banks walk away with these bailouts and then at the same time ended up with huge salaries,” while small businesses received virtually nothing.

It’s not all bad news for small businesses. Fifty Milwaukee-area small businesses were approved for SBA-backed loans in September and October to expand facilities, move into new ones or buy equipment, according to an article in the Business Journal of Milwaukee.

The businesses applied for those loans, ranging from $200,000 to $2 million, after the passage of the federal stimulus package in March which provided for higher SBA-backed loan guarantees and reduced fees to encourage more bank lending.

The Obama administration’s plan to raise the maximum amount for SBA-backed loans from $2 million to $5 million could further energize area small businesses, Wisconsin SBA director Eric Ness told the Business Journal’s Rich Kirchen.

“There’s a lot of pent-up demand from a lot of successful small businesses who want to grow,” Ness said.

The largest loans in Wisconsin went to businesses in the metal industry, commercial printing, outdoor furniture manufacturing and food packaging, said the article.

Greg Huffman, owner of a family-owned hunting supply business, completed a $1.6 million facilities expansion thanks to the attractive SBA-backed lending terms and lagging real estate market.

“You might see ups and downs, but when you have a passionate customer base, they’re with you through thick and thin,” Huffman told the Business Journal.

Microsoft Corp.’s stock soared 10 percent on Friday, as the company’s earnings report defied analysts’ predictions. Amazon’s stock jumped 20 percent Friday, after the company reported a 69 percent profit surge the day before.

Strong sales of Amazon’s Kindle e-reader accounted for the growth, said CNNMoney.com. The company cut the price of the Kindle to $259 from $279 this week.

Microsoft saw its first-quarter net sales decline 18 percent to $3.6 billion, but Wall Street expected the decline to be much larger, said CNNMoney.com.

Cost-cutting measures helped drive profit gains in several of Microsoft’s divisions. The software giant also announced this week the launch of its new operating system, Windows 7, which the company predicts will be a hit, said CNNMoney.com.

Recognizing that many small businesses are still struggling to secure credit, President Barack Obama announced a plan that would encourage community banks to issue more small business loans.

Under the plan, community banks with under $1 billion in assets would be eligible for lower-cost capital if they submit a small business lending plan and document their lending in quarterly reports, said the White House. If approved, the banks would pay the government a 3 percent dividend instead of 5 percent.

Obama also said he will seek legislation raising the limits for Small Business Administration loans from $2 million to $5 million and as much as $5.5 million for manufacturing, according to Bloomberg News.

The president said these steps will lead to “more jobs, more growth, and a stronger economic recovery.”

Some legislators and small business owners have complained that the administration’s recovery efforts have focused too narrowly on bailing out big banks.

Obama asked Treasury Secretary Timothy Geithner and SBA administrator Karen Mills, to gather a group of regulators, congressional leaders, lenders, and small business owners “to determine what additional steps we can take to get credit flowing to small businesses that want to expand,” said Bloomberg News.

Businesses ready to go green can take advantage of an expanded Small Business Administration loan program that rewards eco-friendly projects.

The SBA’s 504 loan program, which offers financing for projects designed to reduce energy consumption by at least 10 percent or which will generate renewable energy or fuels, raised the loan cap from $2 million to up to $4 million. Private banks and the companies themselves provide the rest of the project’s financing.

The SBA program is helping one San Francisco company, Service West Inc., purchase an energy-efficient 132,000-square-foot commercial office building, according to the San Francisco Business Times.

Service West provides contract furniture installation, commercial moving, delivery and warehousing services. The $10.5 million loan for the company’s new property was serviced by TMC Development.

“Service West is a perfect example of how recent changes to the SBA 504 loan program make this type of financing an even better fit for larger projects,” Barbara Morrison, CEO of TMC Development, told the San Francisco Business Times.

The Small Business Administration reminded disaster victims that they do not have to wait to settle with their insurance companies before applying for disaster loan assistance.

Specifically, victims of severe storms and flooding in Kentucky on Aug. 4, 2009, should return their completed loan applications as soon as possible, said an SBA press release. Homeowners, renters, businesses and non-profit organizations of all sizes in Jefferson County, Ky., are eligible to apply for SBA physical disaster loans.

Disaster loans up to $200,000 are available to homeowners to repair or replace damaged or destroyed real estate. Homeowners and renters are eligible up to $40,000 to repair or replace damaged or destroyed personal property. Businesses and non-profit organizations of any size may borrow up to $2 million to repair or replace damaged or destroyed real estate, machinery and equipment, inventory, and other business assets, said the SBA.

Loan amounts and terms are set by the SBA and are based on each applicant’s financial situation.

SBA representatives will be at Disaster Recovery Centers in the area to issue loan applications and answer questions. Click here for more information.