Of Course They Did: Banks Misuse Small Biz Funding


It may come as a surprise to some, but our money is that few people really are taken aback at all. A recent federal investigation has discovered that community banks around the country misused government funds from an Obama program to pay back recession-era bailouts. The money was earmarked for lending to small businesses.

The program itself is under the cruel spotlight as well. The investigation showed the banks had been using the funds to repay those bailouts that many took a few years ago – to the tune of $2.1 billion being misued. By the way, the total fund was just $4 billion, so clearly, more than half of those funds were not used as they were intended.

Program a Bust

Many have questioned over the past few years why this program hadn’t been performing well. Small businesses weren’t growing as intended and of the $30 billion that was made available, only $4 billion was used – and as mentioned, more than half of that didn’t even go to small business owners, who were facing tough times with fewer lending options due to the recession. The Trouble Asset Relief Program or TARP, was made available to banks to lend to the small business owners – either those already established or those looking to begin their businesses. Instead, the cheap loans rarely made to those it was intended for. And worse, the banks only needed to provide documentation that its small business lending was on the rise. Why they didn’t take advantage of this program is beyond anyone’s understanding.

TARP Funding

In fact, the money was instead used to payback the TARP funding because the government money for the small businesses had that cheaper interest rate. One banker, though, said his bank avoided both of the programs and went so far as to say the money set aside for those small business owners was little more than a disguise. He also said it was just a matter of time before the truth came flowing forward. So many bankers were worried about having to repay the bailout funds and because they didn’t see any other way out due to the economy not recovering in the way it was supposed to, they saw an opportunity All in all, 332 banks and lenders participated in the ending program and of those 300+, close to half misused the other funds to pay their bailout monies.

Government Nonplussed

But there’s more. While the money was never intended for any other use, the Treasury Department says the banks did nothing wrong. In fact, last month, Deputy Assistant Secretary Don Graves with the Treasury said that Congress actually “intended” it to unfold the way it did. Pointed out that Congress intended that when it set up the fund.

Despite the defensive the Treasury has taken, it says that 84% of banks actually increased their small business lending. Others aren’t too sure. Last January, Bank of America began calling in its lines of credit extended to small business owners. MultiFunding’s Small Business Bank Report Card showed that small business loans that were held by banks were reduced by $4.84 billion in the third quarter of 2011. The loans that Bank of America called in equaled 8.5%. Clearly, the funding options are not as plentiful as the banks and the government would have people believe.


In September, 2012, American Express what it calls “express merchant financing.” Raja Sengupta, an executive who oversees the program, said it’s different from those expensive merchant cash advances that many small business owners have begun turning to. He insists Amex is offering the financing option to existing business clients who show a strong enough flow of customers using American Express credit cards. If it’s not already obvious – we’re guessing that program doesn’t have a lot of activity, either. Besides, how many American Express credit card users are deemed “enough”?

Some banks even go so far as to recommend non traditional resources, such as microloans and b2b loan products. The question is obvious: even if the banks misused part of the funding earmarked for small business owners, why would they not make use of the additional funds that were part of that program? It’s not as though they’re going to lose money if the small business owner defaults – it’s the government’s money that’s being used.

You can be sure things are going to continue to be difficult for the nation’s small business owners. In fact, it’s believed the number of small business owners, which have been on the decline for several years, will shrink even further – from its current 6.3 percent to eventually around 5.9 percent over the next six years. This, according to BLS, is a stark contrast to the number of Americans in business for themselves in 1950. At that time, almost 13% of Americans operated a small business.

With news like this, the declaration that fewer small business owners are borrowing begins to make sense: they’re not afforded the opportunities to borrow. In fact, last year, lending to these businesses dropped 15 percent, according to a Thomson Reuters/PayNet Small Business Lending Index. Scott Shane, of Small Business Trends, wrote recently,

Making economic forecasts is… made more difficult for the small business sector by the lack of precise measures released by the government …Moreover, measures tell a more positive story about what’s been happening with small businesses lately; however, the negative signs have me concerned that small business sector is weakening once again.

This latest twist and realization about the TARP funds is just one more example of why the recession is still kicking so many American consumers. Without consumer faith, it’s not even realistic to believe the economy will kick into high gear in the near future.

So what is your take? Do you think the nonplussed attitude of the Treasury Department is strange or is it just business as usual with the federal government? If you’re a small business owners, do you have plans to expand this year? Share your thoughts with us.


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