If approved, the program would also allow community banks that received capital in the original TARP program to convert to SBLF and lower their interest payments by increasing loans to small businesses, something many are already doing. The reduction in the availability of credit, however, is not the whole story. There is also less demand for credit by sound firms.
As businesses reduced inventory levels and capital spending, they tended to pay down debt and build cash positions. Indeed, in the most recent NFIB study, 34 percent of businesses reported lower sales as their biggest problem while only 3 percent cited lack of credit. And while some potential borrowers seek less credit, others are no longer qualified to borrow.