$15 billion of state money for loans to small businesses, expenses in vain?

Up to $15 billion in securities backed by U.S. Small Business Administration loans will be purchased by the U.S. Treasury Department in line with the Obama’s program to unfreeze the secondary market for SBA loans. This move is expected to increase SBA lending to small businesses by enabling lenders to sell their existing loans on the secondary market which in turn should free up capital to make new loans. On Monday Barack Obama announced the new plan to revive the SBA secondary market.

Within this fiscal year lending through SBA’s flagship 7(a) business loan program decreased by 58% with lending through the 504 program, which primarily finances real estate, down 47%. Obama announced plans to implement SBA-related provisions included in the economic stimulus bill. Thus, starting Monday the SBA will guarantee up to 90 percent of each 7(a) loan made by private-sector lenders, an increase from the normal 75 percent to 85 percent guarantee. The government expects this high guarantee will encourage lenders to make more SBA loans, because they will have more protection against possible loan losses.

Upfront fees on 7(a) loans that lenders pass along to borrowers also will be temporarily eliminated, as will fees on 504 loans. Borrowers or lenders who were charged any of these fees since Feb. 17 – the day the economic stimulus bill was signed – will receive a refund.

Still, SBA is not the only institution that should be responsible for providing the loans to small businesses. Treasury Secretary Timothy Geithner stressed that all banks have to to increase their lending to small businesses. The administration will require the 21 largest banks that have received government funds through the economic rescue package to report how much small business lending they do every month.

Whichever measures are now taken by the authorities to help small businesses it is not clear if these small businesses themselves will want to borrow money at the time of recession. A February survey conducted for Discover Financial Services found that 23% of small businesses would be very likely to apply for an SBA loan if they became easier to get. 17% said it was somewhat likely they would apply for an SBA loan. What is notable, 90% of the polled said that they had never applied for an SBA loan.