Small business lending has been in a funk for some time now. Small businesses play a crucial part in our economy, and the credit crunch has made it difficult for some entrepreneurs to get the money they need to keep up operations (or even get started). Banks are reluctant to loan to small business — especially to unproven startups. On top of that loans that involve the Small Business Administration can be notoriously difficult to get through. In order to help small business, lawmakers instituted a program aimed at increasing incentives to lenders willing to help small businesses.

The SBA program provided a guarantee of 90% of the loan so that lenders were on the hook for less if the small business defaulted. Additionally, borrowers saw some fees waived. However, the changes were only temporary, and now the program is on hold, waiting for legislators to extend the program further — something that may not happen before the August recess that begins next week. This doubt is just another reason that small business lending faces serious challenges going forward.

How Much Does the SBA Help?

While the Small Business Administration is meant to help startups and other small businesses find the funding they need, the requirements present challenges. Even with the special SBA program in force, though, there are still issues. The Wall Street Journal reports that less than 10% of small business loans are made using SBA resources. This means that even when the government is involved, the red tape makes funding a difficult proposition; many banks refuse to offer SBA loans because of the difficulties.

Special tax breaks for small businesses can be helpful, but such considerations don’t solve the problem of finding ready capital that can be used to hire and pay new employees, in addition to providing what is needed to get a business off the ground (and keep it growing). If the SBA were to review some of its policies, in addition to extending the recent program, it is possible that the agency could become a bigger part of the small business lending landscape in the future.

Alternative Options for Small Business Lending

The current climate means that small businesses will need to get creative about their funding sources. Venture capital might be helpful as well, but it is increasingly difficult to find, since the economic climate has put a crimp in the amount of capital available. With banks reluctant to lend money to startups and other small businesses (and many community banks pressured by recent commercial real estate losses), and venture capital increasingly hard to come by, the future of small business lending is likely to include some creative sources.

Some small businesses are turning to credit cards for more of their operations. Some credit card issuers are trying to make their offerings more attractive to small businesses by creating networks that offer flexible funding. While there are definite risks associated with using credit cards to fund small business, the ease of the funding, and the flexibility, provide an alternative to more traditional bank lending.

Another option is social lending. Person to person lending has increased in the last few years, and some small businesses are seeing promise in the way the system works. Prosper and Lending Club provide the opportunity for small business owners to look for funding — and it doesn’t have to all come from one place. Other social sites like Kickstarter also use the social concept to fund entrepreneurs. It is quite possible that the future of small business lending is similar to person to person lending.

Bottom line: Right now, the future of small business lending is a bit uncertain. Most agree that small businesses are important to the economy, and that more funding is needed for them. There are new ideas for obtaining funding, but without new programs and incentives for small business lending, and more help for small businesses in the way of financial considerations, this mainstay of the U.S. economy could be in serious trouble.