In mid-October, President Obama moved to raise the amount of credit extended to small businesses. If Congress approves his plan, the measures would enable community banks to borrow at low rates from the Treasury Department's Troubled Asset Relief Program (TARP). It would also raise loan caps on some Small Business Administration (SBA) programs. To qualify, the banks would have to show how they would increase lending to small enterprises.
The relief could not come a moment too soon. The job-creation engine known as small business has been slammed, not only because of falling demand but also because the normal flow of financing has slowed to a trickle. Small enterprises have created two-thirds of all new jobs since 1994 and they employ more than half of all private-sector employees. (The SBA's definition of a small enterprise is "an independent business having fewer than 500 employees.") In September, for the second straight month, they laid off more workers than mid-sized or large employers. Prior to August, small businesses had never been the biggest source of layoffs, according to employee payment and data firm ADP, which began tracking the figures in 2001. Meanwhile, the U.S. unemployment rate hit 9.8% in September, and many analysts expect unemployment to hit 10% or more before topping out.
Last month, a survey by the National Federation of Independent Business (NFIB) found that expansion plans for small enterprises were at a 35-year low. That's no surprise, given that their usual sources of borrowing -- banks, government-secured financing, venture capitalists and credit cards -- are far more limited than a couple of years ago. The good news is that some tentative signs of improvement are turning up. Interviews with Wharton experts, banking officials and spokespeople from small business development organizations suggest that this patchwork of finance sources, all battered by the current financial crisis, is inching back towards pre-recession lending levels.
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