President Barack Obama's $30 billion small community business lending program faces one big challenge: many of the community banks and businesses it's supposed to help don't want it.
The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.
It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago. But interviews with seven community bankers, as well as small business owners, show a reluctance to participate.
"People in my constituency can't get credit, and this will get money out to small businesses, who are the engine of job creation for this country," said Republican Sen. George LeMieux of Florida, who co-authored the amendment that created the lending program.
Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.
Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.
Ninety-one percent of small business owners surveyed in August by the National Federation of Independent Business (NFIB) said all their credit needs were met. Only 4 percent cited a lack of financing as their top business problem. Plans for capital spending were at a 35-year low.
Jack Rajala just laughs when asked if he wants to take out a loan today. He's in a fight to save his family's lumber business that has been buffeted by the recession and housing meltdown.
"I've seen many ups and downs; this is unquestionably the toughest," said the 71-year-old Rajala, the third-generation owner of Rajala Companies of Deer River, Minn. Since 2008, his company closed two factories and halved the number of employees to less than 100 as orders plummeted for windows, floors and door frames. Annual revenue is down 50 percent since 2008 to $5 million, and the company is losing money.
Rajala is symbolic of the challenges faced by Obama's small business lending initiative. The $30 billion fund will be run by the Treasury Department, and money will be awarded to banks deemed strong by regulators. Banks that have less than $10 billion in assets are eligible.
"It will provide incentives to invest and create jobs for 4 million small businesses," Obama said at a news conference Sept. 10. "It will more than double the amount some small business owners can borrow to grow their companies."
Obama has to bridge the gulf between money that's available and the needs of businesses. The NFIB survey found businesses don't intend to borrow until they have more customers.
Community banks will have to pay an annual dividend of 5 percent to the U.S. Treasury. However, when banks increase their lending to small businesses, their dividend rate declines on a sliding scale. So, if a bank increases its small-business lending portfolio by 2.5 percent, the dividend payment goes down to 4 percent and so on, said Paul Merski, chief economist at the Independent Community Bankers of America, the lobbying group for small banks.
The dividend payment increases to 7 percent if banks don't lend to small businesses.
"The crucial questions facing business owners are does it make sense to make an investment right now, and will it generate positive returns?" Josh Lerner, professor of finance and entrepreneurial management at Harvard Business School.
Noah Wilcox, CEO of Grand Rapids State Bank, with two branches in Minnesota, said he already has more capital at his $250 million bank than he can lend out.
"Many of our clients, business owners, put their projects on ice in 2008 because their job number one is to see their company through to the other side of this economic crisis," said Wilcox.
And then there's concerns that the government money will have strings attached.
The fears stem from what happened under TARP, the Troubled Asset Relief Fund, formed at the height of the financial meltdown to pump money into banks. Banks that accepted TARP money had to later cut dividends to shareholders and limit compensation to top executives. They were also penalized for early repayment.
In this new legislation, the government is taking steps to avoid the tarnish that accompanied TARP. The key part of this effort: Banks can return the money without penalty if rules governing the small business loans change.
But Chase, the bank CEO in Memphis, isn't convinced.
"The rules can be changed any time," said Chase.