Contained within the Obama administration's Jobs Program Redux, we have a policy proposal to give $30 billion in TARP funds to community banks, on the premise they will lend to small businesses.

The questions become, what is the true state of credit for small business and is the premise that community banks would loan out these funds to small businesses valid?

There are two reports out on the state of credit availability for small businesses.

The first is this study from the NFIB.

First is this bit of bad news, where most economists agree, unemployment is not going to improve:

The “job generating machine”remains in reverse, jobs are being lost and new hiring is very weak. Ten percent of the owners increased employment, but 22 percent reduced employment (seasonally adjusted). While the trend for increased employment is going in the right direction, there is no indication that job growth will be strong enough to dramatically reduce the unemployment rate.

Capital spending is at an all time low. Even more scary is the report on small businesses plain making money. Bottom line, small businesses are not selling enough and when they do, they are having to slash prices.

Of the 12 percent of owners reporting higher earnings, 50 percent cited stronger sales (unchanged) as the cause and eight percent credited lower labor costs. For the 54 percent reporting lower earnings compared to the previous three months, 65 percent cited weaker sales, four percent each blamed rising labor costs, higher materials costs and higher insurance costs, while six percent blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.

What about the small business credit crunch? Well, frankly it does not appear to be there with only 4% responding that obtaining loans was their #1 problem.

Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15 percent reported loans harder to get than in their last attempt, unchanged from November. Still that is not nearly as severe as the financial distress reported in the pre-1983 period.

Twenty-four months of recession have sapped the financial strength of many small firms. Thirty-three (33) percent reported regular borrowing, fairly typical of post-1983 and unchanged from November.

Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92 percent of all owners either obtained the credit they wanted or were not interested in borrowing. Only 4 percent of the owners reported “finance”as their #1 business problem (down 1 point).

Here is the SBA Q3 2009 report on trends. Note the massive drop in venture capital deals, down 354, while overall VC funding is down 2.4% (Silicon valley VC investing hit a 12 year low for 2009).

On loans, the report shows demand is down 39.2%, credit criteria is up 39.4%.

Now assuredly a host of small businesses already tanked and of those who tanked odds are they could not get additional loans. But of those left, it does not appear they want credit or loans and it sure does appear to be a demand problem, i.e., they plain need more sales, more demand and higher prices for their goods and services.

Here is another study, but a regional one, the South West, from the Atlanta Fed:

"A recent small business survey performed by the Atlanta Fed suggested that business loan demand was down primarily because of weak sales and modest revenue prospects. The credit availability picture was mixed. No surprise, construction-related firms and manufacturers had the most trouble obtaining credit during the last six months. But others did well in having their credit needs met. Of more than 200 respondents, nearly half did not look for credit at all, mostly citing weak sales or sufficient cash reserves."

Of those in the Atlanta Fed survey who tried to get a loan, they did say they were having problems, but it seems, at least to me, the real problem is demand, sales.

So, why are we going to give $30 billion dollars to community banks on this premise they will not horde the cash and instead make loans with it?

It seems this isn't the real crux of the problem for small business to start hiring again, so maybe those funds would be better utilized in small business contract awards for projects.

How does one increase demand for small business? Well, Buy American can't hurt, This topic and it's effectiveness will be visited in a subsequent post.