WASHINGTON — Federal Reserve Chairman Ben Bernanke pressured the nation's banks Monday to do more lending to small businesses, while the Obama administration spotlighted a new tax credit for employers that's designed to help smaller firms begin hiring again.
"The formation and growth of small business depends critically on access to credit. Unfortunately, those businesses report that credit conditions remain very difficult," Bernanke said during a speech to a Fed meeting that addressed the financing needs of small business.
Small businesses employ about half of all Americans and account for roughly 60 percent of job creation, the Fed chief said, adding that over the past two decades start-up small businesses accounted for one in four new jobs even though they employed less than 10 percent of the work force.
Loans to small businesses fell to $670 billion in the first three months of this year, down from $710 billion in the second quarter of 2008. Credit conditions remain tight for smaller firms, Bernanke said, and "to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans."
The Fed has held more than 40 meetings around the country seeking to promote more lending to small businesses. However, the central bank also has regulatory power over many of the nation's important banks, and it and other regulators are leaning on lenders to keep more capital socked away to cover potential losses and are discouraging too much risk taking.
While many businesses complain that they're being shut out from borrowing, a large number report that they're seeking fewer loans because they lack customers. There isn't enough demand for goods and services to justify additional hiring or purchasing inventory to be sold to customers.
"An important but difficult-to-answer question is how much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn and how much by restricted credit availability," Bernanke said.
Bernanke's Fed has taken numerous steps to keep credit flowing to large corporations, including backstopping the commercial paper market, where big companies issue short-term debt to fund their day-to-day operations.
Helping smaller firms is vexing, however. Historically, many of them have short life spans and lending to them amid a deep recession can be imprudent. Further, the collateral that many have offered in seeking loans — real estate and equipment — is sinking in value.
Bernanke didn't provide any new ideas, but he used his high profile to pressure banks to better assess the creditworthiness of borrowers.
"It is in the lenders' interest, after all, to lend to creditworthy borrowers; ultimately, that's how they earn their profits," he said.
The difficulty in obtaining credit is thought to be a reason for the stubbornly high number of unemployed and underemployed workers nationwide. The jobless economic recovery is already a top campaign issue ahead of November's midterm congressional elections.
Calling attention to a new tax-credit program for hiring, the Treasury Department released a report Monday estimating that 4.5 million newly hired employees might make their employers eligible for a temporary tax break. The report's release came as officials visited North Carolina, a state that's struggling with sluggish job growth.
President Barack Obama signed the HIRE Act in March, which waives employers' 6.2 percent payroll-tax contribution if they hire workers who've been unemployed for 60 days or longer.
"Small businesses might be less aware of the tax credit," Assistant Treasury Secretary Alan Krueger said Monday, estimating that businesses, many of them small, have hired 4.5 million new workers who'd been jobless for eight weeks or longer.
That makes these firms, who hired from February to May this year, eligible to receive up to $8.5 billion in HIRE Act tax exemptions and credits.
The number of applications for the tax credit won't be known until after the April 15 tax-filing deadline next year. Officials fear that small businesses, which don't have their own personnel offices, may be unaware of this tax incentive for hiring.
Appearing with Krueger in Sanford, N.C., Andy Warlick, the CEO of yarn maker Parkdale Mills, said the tax credit was helpful.
"I don't think anyone is going to make a huge investment just based off of this act, but it is one of those things we have been able to take advantage of. ... Anytime we can reduce our tax burden, it helps us," Warlick said.
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