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Bank Rules Could Boost Small Business Costs

Brian O'Connell, MainStreet

WASHINGTON (TheStreet) -- Are small businesses lining up behind the financial reform bill being bandied about in Congress? Not really.

Small-business groups have been hectoring banks for two years to open credit lines and start lending again. But that hasn't been happening and the reform bill doesn't fix that.

Major U.S. bank cut business loan balances by $1 billion in October alone, and small business lending was down significantly for the entire year, according to the U.S. Treasury Department. From late April to the end of 2009, bank lending to small businesses fell by 11.6%.

"Business conditions for borrowers have worsened as well," said Ben Bernanke in a speech in Chicago last week. "Small business conditions are much tighter than anytime in recent memory. We need to find a balance that makes economic sense."

Banks should be "making good loans that are expected to be repaid," but "not be so conservative and restrictive that they turn away" credit-worthy borrowers, he added.

But given the fact that U.S. small businesses have created 65% of all jobs during the past 16 years, you'd think that a big part of financial reform would be to ease credit and lending programs to small businesses.

Mark A. Calabria, director of financial regulations studies at the Washington-based Cato Institute says a key component of the reform bill -- the development of a new Consumer Financial Protection Agency -- could increase legal costs for lenders. Banks would likely pass those costs down to small business borrowers, making it even tougher to get a loan.

Another lending resource favored by small businesses, angel investors (business funding from wealthy individuals to new companies), may also face regulation. Despite the lack of evidence that the angel community contributed to the economic collapse, Washington wants start-ups seeking angel funding to file financial documents with the Securities and Exchange Commission.

That could result in delays for small businesses in getting funding because the SEC has a 120-day review process for all filings. It would also likely mean increased costs to small companies, which would have to hire lawyers to handle the legal process of reporting to the SEC.

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