Government-backed loans to the nation's small businesses dropped sharply last month after a key federal program ran out of money.
The reduction in lending comes as officials are scrambling to find a way to stimulate the small-business sector. On Monday, Federal Reserve Chairman Ben S. Bernanke said loosening credit to small businesses should be a priority for banks and policymakers.
"Making credit accessible to sound small businesses is crucial to our economic recovery, and so should be front and center among our current policy challenges," Bernanke said at a meeting on small-business financing in Washington.
The chill in lending couldn't come at a worse time for the nation's small businesses, owners of which say they are withering because of a lack of funds for inventory, equipment and expansion. Legislation to renew the program — which makes small-business loans less risky for banks and also eliminates costly fees — has passed the House but stalled in the Senate.
Nationwide, banks made less than $400 million in loans backed by the Small Business Administration's flagship program in June, down from $1.5 billion in May, according to the SBA. The total number of loans in the program was also down considerably, from about 5,000 in May to about 2,000 in June.
In California, banks made 324 loans in all of the SBA's programs in June, down from 692 in May. Just 93 loans were made in Los Angeles, down from 248 in May. SBA loans are a small fraction of total lending to small businesses, but they are considered an indicator of how the market is doing overall.
J. Mark Quinn, director of the Small Business Administration's San Francisco district office, said the drop coincided with the loss of stimulus funds that allowed the federal government to guarantee loans for 90% of their value. The program ran out of money at the end of May.
"Lending dropped off when the guarantee fell," Quinn said.
The loss of the guarantee put hundreds of loans on hold, jeopardizing funding for businesses across the country, said Paul Merski, senior vice president and chief economist for the Independent Community Bankers of America.
"It's been a very disjointed, disruptive process," Merski said. "We have many community banks that have loans in the pipeline … and with the money running out, those loans are in limbo now." Lenders are waiting, he said, to see what Congress will do.
This is the fourth time that money has run out for the small-business stimulus. The Obama administration has urged Congress to renew the funds, which are included in legislation that also includes tax cuts for small businesses and funding to help community banks make loans to smaller firms. The Senate is expected to consider the package this month, possibly as soon as this week.
"Now is not the time to pull back," SBA Administrator Karen Mills said in an e-mail. "Despite improvements in the economy, we need to continue providing small businesses the tools they need to grow, create jobs and lead us into recovery."
Bernanke acknowledged criticism from lenders who have complained that regulators might be contributing to the problem by being too strict with banks in the wake of the mortgage meltdown. Banking industry executives have said for months that the smallest community banks — which do much of the nation's small-business lending — are under pressure to be so conservative in their lending standards that they cannot make many small-business loans.
Bernanke said the Fed had started training its regulators in small-business lending. The agency has also met with bankers to better understand their concerns, he said.
"We take this issue very seriously," Bernanke said. "Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers. Doing so is good for the borrower, good for the lender and good for our economy."