One-third of small businesses say it is harder to get credit today than a year ago, and about 70% are worried about their ability to access financing to run their business in 2011, according to a recent Greenwich Associates survey. Contributing to their concern, surely, is the fact that many community banks were hammered by the financial crisis and are still undercapitalized.

Enter the Small Business Jobs Act of 2010, signed into law by President Obama last September. The legislation directs the Treasury Department to bolster the capital levels of community banks with as much as $30 billion to spur small-business lending. Financial institutions that qualify (the program is voluntary) will issue preferred stock to Treasury, and the funds will count as Tier 1 capital.

Will the program actually get more money into the hands of small-business borrowers? Capital from the so-called Small Business Lending Fund program will be low cost. To start, banks would pay only a 5% dividend on the preferred stock. A community bank would be lucky to get capital in the private markets at even double that rate, says Paul Merski, chief economist of the Independent Community Bankers of America. “The private capital markets for community banks are still frozen,” he says. In theory, banks could leverage the SBLF capital by as much as 10 to 1. As the economy gains steam and demand from small-business borrowers picks up, the SBLF could get credit flowing again, says Merski.

But some banking groups are not happy about the term sheet released by Treasury just before Christmas, and their concerns could dampen participation and restrict the program’s influence. For one, lenders will have to prove small-business loan growth in the first two years, on a quarterly basis, to qualify for lower rates. The dividend payable to Treasury could fall to as little as 1% if the bank demonstrates a 10% increase in small-business lending, for example. But if a bank has a slow quarter, then the rate it’s paying could rise (although only as high as 5%).

Second, Small Business Administration loans that a bank originates will only partially count toward the tally of a bank’s small-business loan portfolio. Only the nonguaranteed portion of SBA working capital loans will be included in the tally — usually about 25% of the principal.

Stung by the Troubled Asset Relief Program, banks may also be generally leery of asking for a capital infusion from the federal government. Treasury tried to head off those concerns by stating in the SBLF document that the program will not require restrictions on bankers’ executive compensation or include the issuance of warrants, as TARP did. In addition, a provision in the Small Business Jobs Act will prevent any possibility of a TARP-like “bait and switch.” That provision lets banks repay the capital without penalty if the federal government changes the terms of the deal, says Merski.

Banks have to apply to the SBLF by the end of March. After a bank applies, Treasury will respond with either an acceptance, a rejection (officially the application will be “withdrawn”), or a qualification that the bank raise matching funds from “private, nongovernmental sources.” Those funds would be subordinate to the SBLF money. Banks asked to raise private funds will be those whose balance sheets “are not as strong as the most highly rated banks,” says Merski.

Loans can be up to $10 million, and borrowers can’t have more than $50 million in revenues. Community banks with less than $1 billion in assets will be eligible for investments of up to 5% of risk-weighted assets, and banks with between $1 billion and $10 billion in assets will be eligible for up to 3%.

“I think every bank out there that could qualify should take a good, hard look at [the SBLF program],” says Merski.