Following the 2008 financial crisis, credit markets froze, making it difficult for small businesses to secure the loans needed to operate and grow. In response, the U.S. government created the Small Business Lending Fund (SBLF) to encourage local lenders to open their coffers to Main Street.
The program was not a direct-to-business loan or a handout to banks. Instead, it was a strategic investment program that provided low-cost capital to healthy community banks and Community Development Loan Funds (CDLFs).
How the SBLF Incentivized Lending
The core of the SBLF was its innovative incentive structure. The U.S. Treasury invested capital in a community bank, and the dividend rate (similar to an interest rate) the bank paid on that capital was tied directly to its small business lending activity.
- Baseline Lending: The Treasury established a baseline of a bank’s current small business lending.
- Rate Reductions: If the bank increased its lending above this baseline, the dividend rate on the SBLF capital would decrease, falling to as low as 1%.
- Rate Increases: If a bank failed to increase its lending, the rate would rise, making the capital more expensive and motivating the bank to either increase lending or repay the funds.
This model created a powerful, market-based reason for community banks to approve more loans for local businesses, helping to thaw the frozen credit markets.
The SBLF’s Role and Impact
Authorized under the Small Business Jobs Act of 2010, the SBLF was a key part of the nation’s economic recovery strategy. While authorized to provide up to $30 billion, the Treasury ultimately deployed approximately $4 billion to 332 institutions.
According to a report from the U.S. Department of the Treasury, program participants increased their small business lending by an estimated $17.7 billion more than they would have without the fund. The program was also profitable, with all participants having fully repaid the principal investment plus dividends, generating a positive return for taxpayers.
Clearing Up Common Misconceptions
Two major misconceptions about the SBLF persist:
- It was a direct loan for businesses: This is incorrect. The SBLF was a bank-facing program. A business owner would simply apply for a standard loan at their local bank, which might have been funded on the back end by SBLF capital.
- It was a bailout for banks: The SBLF was an investment, not a grant or bailout like the Troubled Asset Relief Program (TARP). Participating banks had to be financially healthy and were required to repay the Treasury’s capital with interest.
Modern Lessons from the SBLF
While the SBLF is no longer making new investments, its success underscores a timeless lesson for entrepreneurs: building relationships with local financial institutions is crucial. Community banks and specialized lenders are often key partners in other government-supported financing programs available today, including:
- SBA Loans: The U.S. Small Business Administration (SBA) partially guarantees loans like the 7(a) and 504 programs, reducing risk for lenders and making it easier for businesses to qualify.
- Community Development Financial Institutions (CDFIs): CDFIs are private, mission-driven lenders focused on providing responsible and affordable financing to businesses in underserved and low-income communities.
Frequently Asked Questions (FAQs)
Is the Small Business Lending Fund still active?
No, the SBLF is no longer making new investments. The program concluded after all participating institutions repaid the government’s capital.
How did the SBLF differ from SBA loans?
The SBLF provided capital directly to banks to encourage them to lend more of their own money. In contrast, an SBA loan is a loan from a bank to a small business that the SBA partially guarantees, reducing the bank’s risk if the business defaults.
Was the SBLF program successful?
By most metrics, yes. The program significantly increased small business lending among participants (by over $17 billion) and ultimately returned a profit to U.S. taxpayers.