US President Barrack Obama have introduced a broad package in order to help small businesses to expand federal guarantees and lower lending fees to try to revive the flow of credit will be allocating half of the $730 million government funds.
Treasury will spend up to $15bn to buy securities from banks and cajoling them to write new loans, injecting liquidity and encouraging new lending. The government is taking aggressive steps to boost bank liquidity with up to $15 billion aimed at unfreezing the secondary credit market.
Obama said â€œSmall businesses are the heart of the American economy. They’re responsible for half of all private sector jobs and they created roughly 70 percent of all new jobs in the past decade.” This plan aims to jump start credit markets for small businesses by purchasing up to $15 billion in securities, temporarily raise guarantees to up to 90 per cent in the SBAâ€™s 7(a) loan program, and temporarily eliminate SBA loan fees to reduce the cost of capital.
This move will provide lenders with the confidence that they need to extend credit, knowing that they both have a backstop against their risk and a source of liquidity.
Obama Small Business Capital Gains Strategy
The government is willing to guarantee up to 90 percent of small business loans, eliminate fees and will demand monthly reports on small business lending from the largest 21 banks which have taken federal money. All other banks getting government assistance should report quarterly on small business loans. And those banks that arenâ€™t taking government funds are expected to make more of an effort to increase small business lending. Increasing the reporting requirements on banks is to tabulate the lending they offer to small business.
Obamaâ€™s primary focus was on leaders of small companies and community lenders. So, small community banks representatives were invited to the White House along with small business owners to discuss the new measures aimed at improving liquidity.
Treasury Secretary, Timothy Geithner said “You banks need to make the extra effort to make sure that good loans are getting to creditworthy small businesses, in order to serve the larger public good. And given that role that many banks played in causing this crisis, you bear a special responsibility for helping America get out of it.” He also ordered the Internal Revenue Service to issue new rules to help small businesses. One of them will allow businesses that make up to $15 million to claim losses for the past five years in the current tax year. The White House says that amounts to a rebate on taxes paid in previous years.
The financial-stability plan chartered by Geithner involves temporarily eliminating upfront fees of up to 3.78 percent and some processing charges on certain SBA loans that lenders typically pass along to borrowers. It also increases the government guarantees on certain loans to 90 percent, up from 85 percent for loans below $150,000 and 75 percent for large loans. This program should address the crucial problems and permit economic stability to be regained.