But plenty of small-business owners and advisers say the problem is that banks are sitting on the funds they've received from federal programs in order to boost their balance sheets. "More than half of our customers would be able to accelerate growth plans and add jobs with access to additional capital, but they're absolutely handcuffed right now," says Jamie Pennington, co-founder of Flexible Executives, a temporary-staffing firm.

Banks counter that an increase in SBA guarantees doesn't increase the funds they have available for SBA lending. Ted Morgan, senior vice president at BNB Bank, says "it's still the banks' money" getting loaned out, and that SBA loans still mean a loss for banks if a borrower defaults, even with the government backing. While the increased guarantee level helps a lot, he says, the SBA is simultaneously tightening its standards for what qualifies as a reimbursable loan loss, meaning many banks are increasingly wary of being left holding the bag.

All told, Morgan says, the government's efforts in the stimulus package had a huge impact on lenders, and the 35% drop in SBA loan volume "was a heck of a lot better than it would have been otherwise."

That drop in volume can also be attributed to a drop in the number of lenders. CIT Group, once the top SBA originator, cut its loans by 86% (in dollar volume) between September 2008 and September 2009, as the firm teetered and then fell into bankruptcy. "For every CIT, you have to come up with 25 community-bank lenders," says Charles "Tee" Rowe, CEO of the Association of Small Business Development Centers.

Small banks are inherently at a disadvantage to larger lenders, says Paul Merski, senior vice president and chief economist for the Independent Community Bankers of America, since they generally have to get pre-approved by the SBA, a process that can take months thanks to backlogs. "The [federal] programs are set up to work; it's really just an execution issue [at the SBA]," he says. Reining in "overzealous" bank regulators and continuing to bolster the secondary market for SBA loans (one component of last February's stimulus bill) will also help entice more lenders, Eastern Bank CEO Richard Menzies told a House committee in October.

Calling on Angels
If current government actions aren't working, what would? The NFIB, for one, advocates a business-payroll tax holiday, broad-based tax breaks, tax holidays for consumers, or all three. Bloom suggests having the SBA become a direct lender for a limited span of time, say, 12 to 18 months. (The agency already does this for individuals and businesses affected by national disasters.) Pennington and others say more stimulus money and more pressure from banking regulators is what's needed. "Dedicating only one half of one percent of the total stimulus package toward small businesses, which have created two-thirds of the nation's jobs in the past 15 years, is just ridiculous," she says of the $5 billion total set aside so far.

In the interim, many small-business owners are tapping resources outside the banking sector, namely, private investors. The landscape there is only slightly less bleak. Angel investors, usually the first source of outside equity for small businesses, shelled out 27% fewer dollars in the first half of 2009 compared with the same period in 2008, according to the Center for Venture Research at the University of New Hampshire. The one bright spot? The number of deals increased 6%.

Venture capitalists were even more tightfisted. In the first three quarters of 2009, 463 firms received their first infusions of venture capital, down 50% from 2008, and the dollar volume of such deals dropped 58%, year over year, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association. The third quarter, in particular, showed the lowest dollar volume for such financings in the nearly 15-year history of the survey.

Perhaps the best hope for companies eager to tap federal resources is to take another route: become a government contractor. Federal agencies are required to give a certain percentage of work (the SBA's recently declared goal is 23%) to small and minority-owned businesses, says small-business counselor Manninen. He is crafting such a plan with Doherty, who quips, "That's my government bailout."

Alix Stuart is a senior writer at CFO.

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