BizSugar.com › News and Politics › Problems Spring Up in Small-Business Loans

The crumbling condition of small business loans is threatening to hamstring the recovery of the U.S. economy, and tag banks with rising losses over the coming year.

The U.S. government's Small Business Administration said losses from loans made through its lending programs more than doubled in 2008, reaching nearly $1.3 billion. In 2007, the SBA charged off -- or took permanent losses against -- $504 million of the loans; in 2005, it charged off a much smaller $276 million.

In aggregate, small business can have a big impact on the economy. Many economists estimate small businesses provide half of all jobs nationwide, although some academics dispute that figure. Perhaps just as crucially, small businesses also typically pay local taxes and also support local real estate economies by filling smaller commercial store fronts and office spaces.

Most lenders do not write nearly as many small business loans -- which are generally considered to be unsecured loans of less than $100,000 -- as they do mortgages, credit cards and corporate loans.

But small business-related problems are likely contributing to losses among other loans, especially credit card and home equity loans, which are going bad at quickly rising rates.

That's because small business owners often fund their concerns with home equity loans instead of classic unsecured credit card-like loans, which charge much higher interest rates.