Use TARP to Directly Aid Small Business Lending

When the history of the worst recession since the Great Depression is written, August 2008 will stand out as a pivotal month. That appears to be when the credit crunch became a vicious cycle, consuming small businesses in a vortex of vanishing credit lines and increasingly restrictive loan terms.

For Mark Lane, president of Coed Sportswear and Printed Matter, that's when his bank of seven years called in all of their notes, despite the fact that he'd made a host of difficult decisions -- laying off employees, cutting benefits, and slashing other costs -- to maintain what he thought was a "strong, healthy" banking relationship.

"In 19 years of business, neither Coed nor Printed Matter has ever missed a payment on any of its term loans, mortgages, or interest payments," he told the Senate small business committee during a recent hearing. Even so, his bank froze all of his company's credit lines and asked him to find a new bank to take over all of its existing loans.

"I have made presentations to six banks since August, all with the same result. No bank is interested in taking on Coed or Printed Matter in the current economic environment without at least six months of sustained profitability," he says. Like most apparel companies, his firm's sales are seasonal. As such, meeting that standard, even in a good economy, would be difficult.

Because he now lacks credit, two otherwise healthy companies have become cash strapped, "making it difficult to pay vendors in a timely manner, making it difficult to make investments in our growth opportunities, and soon will impact our ability to fulfill future orders," he says.

Among small businesses, Lane's story is all too familiar. The National Small Business Association (NSBA) found in its year-end survey of members that nearly one third (28 percent) had credit lines or credit card limits cut in the previous six months. "These sometimes arbitrary reductions are having a profoundly negative effect on America's small business community," NSBA President Todd McCracken told the committee, who says the number is likely higher now.

Of course, the government's Troubled Asset Relief Program (TARP) was supposed to inject capital into banks to allow them to lend more freely. But as I noted last January in my column TARP Funds Fail to Reach Small Businesses, very little of that money has trickled down.

In fact, 10 of the 13 biggest beneficiaries of TARP reduced lending between the third and fourth quarters of 2008. During that time, their outstanding loan balances declined by $46 billion, or 1.4 percent, according to an analysis by The Wall Street Journal. In all, these banks received $148 billion in taxpayer funds intended to make loans more readily available.

Instead, many of those banks have made questionable use of the money. For example, Citigroup, which received $50 billion in TARP funds, made an $8 billion loan to a company in Dubai. And last November, Bank of America, the recipient of $25 billion in TARP funds, spent $7 billion investing in the China Construction Bank.

Those investments may well be prudent, but they fall outside the scope for which TARP funds are intended. Both banks, incidentally, would be bankrupt without government assistance.

Meanwhile, Bob Cockerham and his wife Mary are being pushed to be brink of bankruptcy. They own and have successfully run auto dealership Car World in New Mexico for the past six years. But their longstanding lenders have curtailed critical lines of credit and the auto dealership's floor plan financing, which is used to build and maintain inventory.

"In January 2009 we thought we had made all the hard choices and downsized enough to survive. However, we were told by our floor plan financing lender that they were convinced 2009 would be a much more difficult year, and we were not big enough nor did we have the financial depth necessary to withstand an even larger downturn," he said.

As a result, their lender decided to cancel an emergency $200,000 credit line established several years earlier, cut back on the amount of inventory that it was willing to finance, and gave them 60 to 90 days to find another lender. The dealership's credit record, he noted, was spotless. "We never missed a payment, never," he said.

"Since our lender told us they no longer want us as a customer, there has not been a day or a sleepless night that goes by that we have not been scared, angry, bitter, or upset. Mary and I feel as though we are fighting for our lives, and we are uncertain every day if we are going to lose everything that we worked our whole lives to build, both in business and personally," he added.

James Chessen, chief economist for the American Bankers Association (ABA), noted that banks themselves are under pressure from government regulators to tighten loan standards and are finding it more difficult to raise capital to sustain lending. Even so, he noted, business loans have expanded by 12 percent and consumer loans by 9 percent during the current recession; in contrast, the median number of business loans declined during each of the previous six recessions.

President Obama has already taken several steps to make loans more accessible by lowering or eliminating fees and by increasing government loan guarantees on Small Business Administration loans. But many small business advocates and lawmakers question whether this is enough in the current environment.

That has led to a movement in Congress to use TARP funds to aid businesses directly. Since the Senate hearing last month, committee Chairwoman Mary Landrieu, D-La., and Ranking Republican member Olympia Snowe, R-Maine, have asked Treasury Secretary Timothy Geithner to study the use of TARP to guarantee existing lines of credit for "qualified" small businesses.

Given the history of TARP, directly aiding small businesses would seem to be a far more productive use of the money. The government needs to break the vicious cycle where contracting credit leads to business cutbacks, layoffs, and declining sales, which trigger even more restrictive loan terms or the loss of credit all together. No economy can long survive that downward spiral.