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Thursday, August 6, 2009

Small business still struggling

NEW YORK ( -- While Washington talks up the importance of small businesses and their vital role in economic recovery, small business owners remain caught in a credit maelstrom.

Bank lending is down, credit card interest rates are up, and the country's largest small business lender, CIT Group (CIT, Fortune 500), is hanging by a thread. The top small business credit card issuer, Advanta, shut its accounts down indefinitely.

As President Obama approaches his 200th day in office, here's a look back at his promises and programs intended to help small companies pull through the recession.

The rescue plan
In October, then-candidate Obama issued a campaign paper calling on the Small Business Administration to take emergency measures to assist small businesses endangered by the financial crisis. The three-part plan called for the SBA to increase the loan guarantee it offers banks that make qualifying small business loans, to reduce the fees it charges lenders, and to lend more money directly to small businesses through its Disaster Loan Program.

Two of those three measures were included in the Recovery Act that Obama signed into law in February. The SBA's loan guarantees rose to 90% -- if a business defaults, the government pays the bank back for the guaranteed portion of the loan. The agency also temporarily reduced or eliminated the fees it charges for its loan programs.

Those measures were intended to induce lenders to issue more SBA loans. According to Karen Mills, the SBA's administrator, the recipe worked. The SBA's weekly loan volume is up 45% since the stimulus bill passed, compared to the seven weeks immediately prior.

But the program wasn't a fix-all. The SBA is backing more loans than it was before the Recovery Act, but less than it did before last fall's financial meltdown. For the most recent quarter, ended June 30, SBA's main lending program issued 30% fewer loans than it did in 2008 and 55% fewer loans than it did in 2007.

Obama's third proposal, calling for direct lending from the SBA, was axed from the final version of the stimulus bill. But many small businesses have expressed their support for a program that would allow them to bypass the banks and receive loans directly from the government.

"In the '70s, we could go to the SBA and get a loan with money that was funded [directly], rather than the guarantees from banks," says Clarence McGill of Cincinnati, who owns Integrated Solutions and Services, a facilities management firm, with his son. His 43-person company is doing well but can't grow without a line of credit. McGill has had to skip making bids on lucrative contracts because he can't find a bank willing to offer the financing his firm would need to fulfill the contract.

"Direct lending would definitely be beneficial because there would be no bank risk criteria," he says. "Just like the government deals with GM and Chrysler, the government can say, 'We see a possibility that you may fail, but we'll take chance.' Banks don't say that.

SOurce :- CNNMoney

It's not good. Can Obama proposal rescue small business and US economy???

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