Allocating $3 billion for programs in Maryland, the other 49 states and the U.S. territories could result in banks making as much as $18 billion available to small-business borrowers, O’Malley and the governors of 27 other states said in a letter sent to President Obama on Feb. 24. That’s a ratio of $6 in loans for every $1 backed by the government.
Supporters say the proposal, if adopted by the Obama administration, could help bridge the gap between small-business owners who can’t get credit and bankers who say they’re willing to lend, if they can find qualified borrowers.
That disconnect has stalled the economic recovery because small businesses, which create most of the jobs in the country, have had a hard time finding money to expand.
“As the American economy is recovering from a global recession, one of the lingering challenges continues to be access to credit, especially for our small businesses,” the governors’ letter said. “In the aftermath of excesses on Wall Street, banks have been forced to adopt significantly stricter banking practices in serving their Main Street clients who live and do business in our jurisdictions.”
The initiative O’Malley is pushing would address the problem by carving $3 billion from $30 billion in TARP funds the Obama administration wants to make available to community banks to fuel small-business lending.
Instead of going directly to participating banks, the money would go to state programs that protect lenders in the event a small-business borrower defaults on a loan.
The idea is that banks would be more willing to write loans for quality businesses that fall just short of new, tougher lending standards if a portion of the loan is backed by the government, said Christian S. Johansson, secretary of the Maryland Department of Business and Economic Development.
“We can’t help a business that’s not viable, but we can help a business that’s viable cross the finish line,” said Johansson, who is working with O’Malley on the effort.
O’Malley’s proposal is separate from his administration’s plan to set aside $10 million from the Maryland Industrial Development Financing Authority for small-business loan guaranties.
It’s not clear how much Maryland would receive under O’Malley’s proposal because it hasn’t been determined how the money would be divided up among the states. If the money is divvied up based on population, Maryland could receive about $60 million, Johansson said.
Expanding money for state loan-guarantees could encourage bankers like Joseph Haskins Jr., CEO of Harbor Bank of Maryland, to write more small-business loans.
“It may provide a comfort level for some banks,” Haskins said. “I’m certainly much more inclined to extend a loan where there’s a guarantee.”
Kathleen Murphy, CEO of the Maryland Bankers Association, said she supports the initiative and expects that her members will, too.
A program that would make bankers less reluctant to make small-business loans sounds good to Ellen Valentino, Maryland state director of the National Federation of Independent Business, although she wants to hear more about the details of the program.
“This looks like it could be a good thing, and a way to unfreeze some capital,” Valentino said. “The governor clearly sees that the small-business community in Maryland is in some distress, and he’s looking for unconventional ways to improve things.”
State Del. Anthony O’Donnell, the House minority leader, has a different view. Instead of funneling more money to the states, the federal government should use it to pay down the national debt, said the Republican lawmaker, whose district covers Calvert and St. Mary’s counties.
“The federal government is bankrupting itself,” O’Donnell said. “We’re one of the richest states in the nation. We shouldn’t be looking for a handout.”