Editor's Note: All this week in our special series "Broken Government," CNN is taking a hard look at our nation's government; the frustrating problems and the potential solutions. Today, our Carol Costello reports on why banks still aren't loaning and what the answer is for small businesses. Tomorrow on American Morning, we focus on states that are trying to gamble their way out of the recession.
By Ronni Berke and Carol Costello
You're the owner of a small business that's more than breaking even during this recession. You have good credit and want to hire more people. Therefore, you qualify for a small business loan – right? Wrong.
Jimmie Hughes, who runs office supply business “Grand America” outside of Dallas, says although that description fits him perfectly, he's been turned down for a loan by six community banks.
"I could double the size of my company now if I wanted to, but what I need in order to do that is to have operating capital that I can use to stabilize the situation with my company so I can put some good people to work."
Hughes may be caught in the loan log jam now affecting many small businesses. According to the Treasury Department, the nation's 11 biggest banks cut their small business loan balance by more than $2.3 billion in December. In 2009, the Small Business Administration approved only $9.2 billion in 7(a) commercial bank loans, down from $12.7 billion in 2008.
To loosen up credit, President Obama has proposed moving $30 billion of funds repaid under the Troubled Asset Relief Program (TARP) to community banks to lend to small business owners. But community bankers like Edward Merritt of Boston's Mt. Washington Bank, say cash is not what they need.
"I'm not really looking for more money to lend," he says. "I'm looking for more qualified borrowers to lend to, and that is as big a problem as I see it today as it is the bank's willingness to lend money."
Merritt's bank doles out $7 to $10 million a month in commercial loans, mostly to mom and pop businesses in Boston. He'd like to lend more, but good credit isn't enough these days. If a small business owner asked him for a loan to meet payroll, because his own customers weren't paying on time, Merritt says he would hesitate.
"I would have to ask [him] ... 'why can't you meet your payroll?'"
Banking experts say community bankers have always been more conservative with their loans and that is actually a good thing.
"Community bankers loan money to people they think that can pay it back," says Bart Narter, senior vice president of the banking group at Celent, a Boston-based consulting firm.
"I don't think the goal should be to get money to small businesses. The goal should be to encourage small businesses to hire more people," he adds. "Perhaps it would be a good idea to create a program that reduces taxes on new hires, for example."
Another option could be to devise programs to "temporarily waive the social security tax on new hires, or the Medicare and Medicaid fees," which Narter says could stimulate job growth.
"Community banks are probably better lenders to small business than the giant banks," who just run data though an automated approval process. "Smaller banks will tend to put a little more time and energy into it and really look at the small business more closely," he says.