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TARP Funds Opening to Small Businesses?

By Caleb Groos | Last updated on

The Obama administration is reportedly thinking about opening up some of the $700 billion in TARP funds to small businesses. With TARP money already having been given to automakers and insurance companies in addition to banks, many small businesses ask: why not us?

Troubled Asset Relief Program (TARP) funds were originally intended to help mend financial institutions.

Small business owners and workers watching the goverment use TARP funds to bail out automakers and insurers have since been wondering: where is the bailout for small businesses?

The Washington Post reports that small businesses could soon join GM, Chrysler and AIG as TARP recipients. Though no firm plan has been put forth, Treasury Secretary Geitner reportedly supports the idea of opening up TARP funds to small businesses.

As explained by the Post, if TARP funds were redirected to small businesses, it would likely come through a vastly expanded SBA 7(a) loan program. The 7(a) program is the largest SBA loan program. It allows eligible small businesses access to capital at a lower rate of interest though government backing of loans from private lenders. As previously discussed, the rate of guarantee was recently raised to 90%.

7(a) loans can be used for a wide variety of purposes including: to purchase land or equipment, as long or short term working capital, to refinance existing debt, and to purchase another business.

The Post reports that administration officials want to stem the tide of small business workers joining the unemployment rolls.

Proponents argue that TARP has already been shifted from its original purpose of shoring up financial institutions. With small businesses representing a large proportion of jobs, they argue that boosting loans to small business will help push us onto the road to recovery.

As the Post points out, getting private lenders on board would be key to opening TARP funds to small businesses. Administration officials reportedly are concerned as to whether banks would lower their lending standards in exchange for the enhanced government backing of 7(a) loans.

As declining lending rates illustrate, getting private lenders to participate may be no easy task.

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