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Banks Wary Of Lending, SMBs Wary Of Spending

Despite government efforts to spur bank lending to small businesses, banks remain cautions and business owners continue to take a “we'll see” approach to hiring and expansion.

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According to a survey of the Federal Reserve’s loan officers, “large net fractions of both domestic and foreign institutions again reported having tightened a range of terms on CRE [commercial real estate] loans over the course of 2009.” The causality dilemma refers to the tough lending requirements that have been set to protect loans, and the resulting standstill that has given businesses a hard time with moving forward and jumpstarting economy.

President Obama’s recently passed legislation, the Temporary Extension Act of 2010, extends the American Recovery and Reinvestment Act into the end of April. Essentially it prevents the “micro-managing” of bank loans, an idea that is currently backed by six regulatory agencies, including the Conference of State Bank Supervisors.

The Extension Act effectively appropriates an extra $60-million into the Reinvestment Act, which had already run out. It continues the Recovery Loan Queue, basically moving anyone who was still in line with a loan application to continue the process, while new loans are still on hold. '

A statement released in February on the Federal Reserve’s website stated that, “Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers’ business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry.”

Even though the act is supposed to increase the approval rates for loans, businesses, like banks, seem to be waiting for the coast to clear up before venturing into the waters. Struggling SMB’s, who may need the money the most, are still not keen on the idea of hiring new employees or expanding their reach so soon into the year.

With 8,000 community banks being targeted however, the extra by the extension may not find its way into the hands of lenders as fast as it should. Small businesses have felt the sting of the economy as well, and many are just as leery as the banks about going into more debt.

In a February visit to Nashua, Obama said of his extension, “These are the small, local banks that work most closely with our small businesses - that provide them their first loan, and watch them grow through good times and bad. The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them on capital from this Fund.”

As a result, the banks are beginning to open their doors to potential businesses, though the majority of applicants who are still interested have been from urban areas, where demand for funding has always been high on their list of priorities. While some banks state that a lack of confidence in the economy is what keeps SMB’s from applying, there is no tell how long the extended funds will last.

While many wary businesses are still waiting out the downturn, there’s a good chance that those who had waited in the Recovery Loan Queue may step forward after some careful planning. Those who are still contemplating their options, however, may only have until the end of April before their chance disappears.

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David Liu is a writer and comedian based in San Diego, CA. He writes extensively for Resource Nation, an online resource that provides expert advice on purchasing and outsourcing decisions for small business owners and entrepreneurs.

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