Small Business Lending Enhancement Act

Current Small Business Lending Environment

The small business lending environment is still unstable in the sense that small business owners are unable to get the capital they need to grow and/or sustain their businesses.  There have been many contributors to the decline in small business lending over the years.

In their January 2012, Small Business Lending Fund research, the Congressional Research Service indicated that lenders have become more cautious of who they lend to in response to the economic downturn.  Their fear is based on statistics that small business start-ups are very risky and they want to decrease the chances of loan defaults.  This fear has ultimately resulted in the decreased supply of lending to small businesses.

Even though banks decreased their amount of lending, there is still hope for small businesses to get access to capital and that is through Credit Unions.  While there is a lot of lending going on from Credit Unions there are regulations in place that limit their ability to assist those businesses that are shunned by traditional banks.  This is where the Small Business Lending Enhancement Act comes in.

What is the Small Business Lending Enhancement Act?

On March 22, 2012 Senator Mark Udall introduced the bipartisan bill S. 2231, the Small Business Lending Enhancement Act.  This bill would be an amendment to the Federal Credit Union Act of 1934 [pdf] and it’s credit union lending cap of 12.25% to 27.5%.  According to Rohit Arora, author of Small Business Lending Enhancement Act: Capital Into the Hands of Entrepreneurs, “The most attractive thing about this proposal is that it would help to create jobs without spending any taxpayer money.”

It is estimated that this bill will create 140,000 jobs by targeting funds to small businesses, who account for about 51% of employment in the United States [jpeg].

“There continues to be a phenomenon in this country where small businesses are starving for credit, yet federal government is still standing in th way.  I’m talking about the smallest of local businesses.  Small-business owners know credit unions in their community that have money to lend, and truly want to help.”

-Senator Udall

The Small Business Lending Enhancement Act will enable credit unions to assist those business owners that have been turned down by banks.  These are the business owners who need incremental amounts of capital to get their start-up off the ground or to expand their existing business.  Arora indicates that “credit unions are filling the void when the borrowers are deemed too small to be worth the banks’ time or just don’t fit the lending guidelines of the banks’ corporate headquarters.”

Due to the increased amount of lending by credit unions, up 44.91% since 2007, many of them are hitting their lending cap.  Inside Main Street mentioned in their article, The Small Business Lending Enhancement Act, that “nearly 350 credit unions are facing their cap, and 500 of them have had to slow or stop their small business loan-making altogether.”  This means that they have to turn down other small business owners that would have otherwise been assisted if the credit union did not have a low 12.25% lending cap.

The increased lending cap will allow Credit Unions to offer funding to a larger percentage of business owners seeking financing.  If the cap is raised, it is estimated that it will infuse $13 billion into the economy.  Considering that historically, Credit Union default rates have been much lower than banks, the Small Business Lending Enhancement Act may be just what the economy needs, in addition to the JOBS Act.

Tell us what you think of the Small Business Lending Enhancement Act.  Leave a comment.

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