The Federal Reserve Chairman, Ben S. Bernanke, expressed his solidarity for the Nation’s small businesses and urged banks and financial regulators to grant them loans for their success. Small businesses are responsible for 60% of job creation and employ almost half of all Americans. But the lending to small businesses show a decline in the last two years. Bernanke expressed his concerns and acknowledged the uncertainty in a daylong forum at the Fed’s headquarters.

Federal data reveals that lending fell below $670 billion in this year’s first quarter, a huge collapse, compared to $710 billion granted in second quarter of 2008. “How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability?” Mr. Bernanke asked. “No doubt all three factors have played a role.”

A fall in the value of collateral and real estates that are used to secure loans is one reason for the decline. Borrowing based on personal credit cards and retirement accounts also posed problems. Even for businesses with strong cash flows but with depreciated value of collateral, obtaining credit for their expansion has become increasingly difficult.

Banks say that meritorious borrowers are granted loans and economists too agree that there is no evidence of refusal to lend. It’s only that banks have resorted to traditional underwriting standards after being too lax. Economists also argue that battered balance sheets and weak economic fundamentals have lowered new lending.

“Credit’s not an issue, Customers are the issue”, said William C. Dunkelberg, economist at Temple University. He reiterated that companies are still cutting on inventory and capital spending is at a 35 year low. But, Kevin P. Watters, chief executive at JP Morgan Chase, said banks are considering borrowers who were initially denied loans.

Citing new research, Bernanke said that in the last 20 years it has been seen that companies less than two old have generated a quarter of gross jobs in America which is certainly a reason to continue lending to small businesses in this recession.

The economy will not recover until banks start lending to small businesses, said Federal Reserve Chairman Ben Bernanke.

Bernanke urged banks to loosen lending to smaller companies at a Fed conference Monday, saying that small businesses employ about half of all Americans and account for 60 percent of job creation.

Startups are especially vital, Bernanke said. Over the past 20 years, startup businesses accounted for about a quarter of all job creation.

Meanwhile, big companies are building up their cash reserves and are expected to report strong earnings in the coming week, said the Associated Press.

According to the National Federation of Independent Businesses, roughly one-third of small businesses seeking credit have had trouble getting it. Banks counter that the demand for credit remains weak.

Several big banks, including Bank of America, JPMorgan Chase and Citigroup, have pledged to increase small business lending this year. Total lending to small businesses has continued to decline, however, dropping from around $710 billion in the second quarter 2008 to less than $670 billion in the first quarter of this year, said the AP.

A number of small business owners say they are relying on personal credit cards or dipping into their own savings to stay afloat.

President Barack Obama urged Congress on Tuesday to pass his $30 billion package to boost small business lending by pumping capital into independent banks. The plan, proposed in February, is an effort by the administration to spur job growth.

The banks that receive the money would pay the government a dividend, which would decline as their lending to small businesses increased, said Reuters.The president has also pushed for a number of small business tax credits as part of his economic agenda.

In his remarks to Congress, Obama said passing the measures “shouldn’t be a partisan issue.”

The House of Representatives Financial Services Committee approved its version of a bill to boost small business lending by a 42-23 vote last week, with no Republican support, said Reuters. The bill will be brought before the full House for a vote soon, said Speaker Nancy Pelosi.

The country’s unemployment rate is stalled just under 10 percent, and the president and other Democrats need to counter criticism from Republicans that they haven’t done enough to fix the economy before mid-term elections in the fall.

The Treasury Department announced a new credit plan on Tuesday intended to spur $20 billion in small business lending, especially to minority-owned businesses.

The new program is modeled after state initiatives known as capital access programs (CAP), in which borrowers, lenders and local economic development entities contribute a certain percentage to an investment fund that is used as collateral to support loans issued to borrowers, according to the Dow Jones Newswire.

CAPs have a strong record of lending to minority and women-owned business that may have had trouble getting credit or faced discriminatory lending practices.
Some critics worry that the new program might have some of the same problems that plagued the TARP plan. TARP funneled money to large and mid-size banks in order to boost small-business lending but it remains to be seen if that’s actually happened, said Dow Jones.
The Federal Reserve and FDIC have made a priority of bringing local business leaders and community banks together, an effort praised by the National Minority Business Council President and other groups.
“As a society, we must level the playing field and make capital more available to small enterprises,” Javier Palomarez, president of the U.S. Hispanic Chamber of Commerce.

Small businesses are the “places where most new jobs begin,” President Obama said in his weekly radio address Saturday, a day after announcing new measures to create jobs.

Obama has proposed tax incentives and credits, expanded government loan programs and aid to community banks that he said will help small businesses hire new employees, reported Bloomberg News.

The president’s plan would eliminate capital gains taxes on small businesses in 2010 and give small businesses a $5,000 tax credit for every new job created. In addition, $30 billion from repaid bank bailout money would be distributed to community banks to spur small business lending, said the Associated Press.

The plan would also temporarily increase the cap on Small Business Administration loans from $350,000 to $1 million and expand the SBA program to help refinance commercial real-estate loans, said the AP. All of the proposals would need to be approved by Congress.

The unemployment rate has finally dipped just below 10 percent, but with the public deeply frustrated by sluggish job growth, the administration is refocusing its efforts on job creation.
“Government can’t create these businesses, but it can give entrepreneurs the support they need to open their doors, expand, or hire more workers,” Obama said in the radio address.

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.