Job seekers choosing to open their own businesses dropped to a record low, according to Challenger, Gray & Christmas, a Chicago outplacement firm.

Just 3.7 percent of high-level job seekers exiting the program were starting new businesses down from 7.6 percent in the first half of 2009 and 9.6 percent in the second half of last year, according to a survey conducted by the company on July 19.

Experts suggest that an improving job market and the difficulty getting small business loans may be steering people away from entrepreneurship, said Business Week.

Federal Reserve Chairman Ben Bernanke said last week that small businesses, and especially startups, are crucial to job growth and economic recovery. Bernanke once again called on banks to loosen credit to small businesses.

Some see the lower startup rate as a sign that the economy is improving. The unemployment rate is still high, but the private sector added 593,000 jobs in the first half of 2010, according the Bureau of Labor Statistics.

Startup activity typically increases as the economy improves, Challenger CEO John Challenger said in a statement.

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.

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.

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.

President Barack Obama’s stimulus bill promises billions of dollars to get the economy back on track, but many small business owners are still struggling to understand how to get their share of the stimulus pie.

To encourage banks to fund small business loans, the Treasury Department plans to buy $15 billion worth of securitized SBA-backed loans using funds from the bank bailout program, Dawn Williams writes in the Nashville Examiner.

The SBA also created the American Recovery Capital loan program, which provides deferred-payment loans to small businesses unable to pay current debt. No-fee ARC loans are interest free. Click here to find out more.

Small businesses also can take advantage of a number of tax cuts and credits, Williams writes. Among other provisions, businesses that sell goods and services to the government, businesses that reduce debt and businesses that invest in new plants and equipment in 2009 are eligible for tax breaks.

Find out more at: http://usgovinfo.about.com/od/moneymatters/a/ecstimtaxes.htm.

Business bankruptcy filings are up more than 40 percent from a year ago, with banks much less likely to help struggling small businesses stay afloat, according to Business Week.

But only a small portion of those are Chapter 11 filings, which are more costly, time-consuming and often unsuccessful in turning around a business. Instead, banks push many companies toward Chapter 7 liquidations, so the business can sell off its assets and pay off lenders.

“Today’s lenders – meaning banks – have much less patience for a traditional Chapter 11 reorganization, no matter what size the case,” Kenneth Rosen, head of bankruptcy group Lowenstein Sandler, told Business Week.

Even as the economy begins to grow, analysts don’t expect the bankruptcy rate to drop immediately without more small business loans.