Giovanni Coratolo, director of Small Business Policy at the U.S. Chamber of Commerce, has backed Obama’s actions, saying it will be a huge benefit to small businesses, as it will reduce the risk to banks and make it more enticing for them to give loans. So what will this mean?  

The Small Business Administration guarantees loans up to $20 billion a year in the U.S. economy and yet is projected to approve less than $10 billion in 2009.  This means that many companies seeking an SBA loan will not get approved.  Additional funding to the SBA will not do anything if we are currently using less than 50% of available funding.  How can this possibly assist the economy?

The new administration plans to temporarily eliminate some of the upfront fees on certain SBA loans and increase the guarantee caps to the lenders for these Business Loans, in order to offset administrative costs and reduce risks for lenders.  So the question then becomes: Is this enough?  Will additional funding to the SBA pay off in the long run?  

Loans are now defaulting at approximately twenty percent – an estimate which is somewhat conservative. The anticipated default rate on business loans that traditional lenders will accept is five percent.  Obama’s new plan offers an additional five percent guarantee on the defaults.  So, where does that leave you? Ten percent above the acceptable allotment! The point is that restrictions will not change much because we are still over the five percent default rate.  That’s the bad news.  

But there is significant good news here too.  Additional funding to the SBA means that something is finally being done to help small companies – not just big corporations. Including funding for small businesses in the economic stimulus package will hopefully help unfreeze the credit market and get the economy flowing freely again.  While it may take more than this to change our bleak economic situation, it’s definitely a step in the right direction.