Small Businesses Face Another Tough Year

CHICAGO ( TheStreet) -- Small businesses may not be thriving during the recession, but at least their plight is getting plenty of public attention. Politicians can't seem to stop talking about the role they play in creating jobs and their potential to jump-start the sluggish economy.

The question is, will all the hand-wringing make a difference?

Most recently, President Obama spoke up for small businesses in a meeting with the banking industry's top players, including Jamie Dimon of JPMorgan Chase ( JPM) and Wells Fargo's ( WFC) John Stumpf. One of the president's top priorities was to pressure the country's largest financial institutions to increase lending to small and medium-sized businesses.

There's no question there's a need for new funding. According to a recent report by the British economic research company Capital Economics, business loans have dropped 17% in the U.S. since October 2008. The numbers are even more troubling when it comes to unemployment: About two-thirds of the people who have lost their jobs in the current recession were working at small businesses.

The smallest companies are the ones most in need of loans, since their revenue usually isn't high enough to cover expansion projects. (Large corporations, in contrast, have other options, such as selling off assets or issuing stock.) If we want employment to grow, smaller companies will have to do the bulk of new hiring. But they can't hire if they can't secure new loans to finance their growth.

It's true that loans to smaller, newer companies carry higher-than-average risk. At a time when banks are under enormous pressure to follow regulations to the letter, they're wary of taking chances on relatively unproven players. After all, didn't risky lending help get us into this financial mess in the first place?

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