Portfolio.com reports that after weeks of talk about the credit crunch facing small businesses, Washington finally is doing something about it.

The $636 billion defense bill passed by the Senate Saturday includes $125 million for the Small Business Administration. The SBA will use the funds to increase the government guarantee on its flagship 7(a) loans to 90 percent and reduce fees on its 7(a) and 504 loans. This will return the guarantee and fees to where they were before November 23, when the SBA ran out of the economic-stimulus funds that enabled the agency to make its loans more attractive.

The SBA’s normal guarantee on 7(a) loans ranges from 75 percent to 85 percent, depending on the size of the loan. The higher guarantee made SBA loans even less risky for lenders than they already were, and the fee reductions made the loans more affordable for small businesses. As a result, SBA lending increased dramatically as a result of the stimulus bill, after cratering last fall and winter along with other sources of credit.

A healthy SBA loan market is important for small businesses, especially those seeking long-term credit—loans that banks often don’t like to make without a government guarantee. SBA lenders and small-business groups had pleaded with Congress in November to find money to keep the higher guarantee and reduced fees in place, but Congress failed to act at that point.

As a result, SBA lending dropped when the stimulus enhancements expired.

This month, the Obama administration began pushing Congress to extend these SBA loan enhancements through September 30, 2010, the end of the current fiscal year. On Wednesday, the House tacked on $125 million to the defense bill, which will fund the higher guarantee and fee cuts through February 28. That’s the bill the Senate will vote on Saturday, before returning to health care reform.

The House appropriated another $354 million for the SBA as part of a $154 billion jobs bill—or “son of stimulus” in the words of Republican opponents—that passed Wednesday. This money would keep the higher guarantee and lower fees in place through the end of the fiscal year.

Democrat Nydia Velazquez, from New York, said the two bills “will provide vital funding for SBA to continue offering affordable small-business credit. Since their enactment earlier this year, these reduced-cost loans have put nearly $14 billion of capital into the small-business economy.”

“While this is an important step, much more will need to be done in the coming months if small businesses are going to realize their full potential as the catalysts of job creation,” said Velazquez, who chairs the House Small Business Committee.

The Senate has no plans to vote on the House’s jobs bill before it goes home for the holidays. It instead plans to craft its own legislation to boost jobs when it returns in January. So the fate of the SBA loan enhancements is uncertain after February 28.

Read more at: Portfolio.com