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Small Banks Shy to Take Government Money

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Small Banks Shy to Take Government Money

Small business lending is improving, but it’s taking a while to catch up to prior years.

Sound familiar? Grit your teeth: so far small banks organized as corporations applied for less than a third of $30 billion available from the Small Business Lending Fund, according to the Treasury Department.

A total of 676 banks organized as C corporations had applied for $9.5 billion of capital under the Fund, while S corporations have until June 6 to apply, according to a Bloomberg Businessweek story. (The shortest explanation of the organizations: C Corps are separately taxable entities while S Corps are pass-through tax entities).

Most small banks didn't need the government money because of weak demand for loans -- now improving -- and S corporation banks aren’t likely to borrow the remaining funds, say some economists.

For smaller banks that see an increase in lending, the program will be useful because the capital markets generally aren’t open to them. 

Some banks had issues with the Treasury’s Troubled Asset Relief Program, where the rules recently changed. They may be hesitant to take money from the Treasury, said Gerard Cassidy, a banking analyst with RBC Capital Markets.

“If you can avoid getting involved with the government, you do,” Cassidy said.

Sounds like good advice for everyone.

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