Obtaining bank credit - one of the toughest problems facing many small business owners - could get easier soon thanks to a $30 billion credit funding program designed to address the decline in lending to small businesses. This is the administration's most direct attempt since the financial crisis to funnel more credit to these businesses by investing $30 billion in community banks (and giving them incentives to re-lend the money to small business owners).

The Small Business Lending Fund - first outlined by President Obama in his State of the Union address in early 2010 - won Senate approval at the end of July when two Republicans broke with their caucus and voted in favor of the bill. The initiative is intended to spur banks to improve access to loans for credit-worthy businesses. Both President Obama and Federal Reserve Chairman Bernanke have linked the credit crunch in the small business sector to slow job growth nationwide. The bill is supported by the American Bankers Association.  

Originally part of the Troubled Asset Relief Program, the lending fund was separated from the TARP initiative because policy makers feared that community banks might be deterred from participating due to TARP restrictions and because of concerns about any stigma associated with the bailout of Wall Street bankers.

Further measures included in The Small Business Lending Fund are intended to help the launch and growth of small businesses and include the following:

• $11.7 billion in small business tax breaks, including a new $500,000 limit on expensing new business equipment;
• An increase in the limits on government-guaranteed loans from $2 million to $5 million;
• Full write-off of health insurance costs for self-employed workers

The $30 billion fund would be used to buy preferred stock in small banks - institutions with less than $10 billion in assets - which would pay a dividend of 5 percent to the federal government. Dividend rates could decline to as low as 1 percent for banks that increase their lending to small business by 10 percent over 2009 figures. The more the banks lend, the lower their payments. Capital costs for participating banks that fail to increase lending to small businesses would rise incrementally to a maximum of 7 percent. The Treasury Department participated in the design of this program.

Describing the fund as another bank bailout, Republican opposition likened The Small Business Lending Fund to TARP. Some analysts in the private sector were concerned that the program doesn't guarantee that bank recipients will lend more to small businesses. Some believe banks will use most of the funding to cover existing losses. Democratic supporters believe the bill will increase investment in the small business sector, and that it provides sufficiently strong protection for taxpayer money. According to the nonpartisan Congressional Budget Office, the fund will generate $1.1 billion in dividends and loan repayments over a 10-year period.

To determine what this means for your business, consult your tax professional.