President Barack Obama outlined a proposal on Wednesday to boost small-business lending. The plan aims to increase the maximum size of SBA-guaranteed loans and offer capital to community banks using TARP funds. But without details of the initiative, community banks may not be ready to jump on board.

Local banks have consistently been a delivery channel to their neighboring businesses, providing them with capital to operate and expand. "These are the community banks who know their borrowers, who gave them their first loan, who have watched them grow from down the street – not from Wall Street," said Mr. Obama.

But, wary of the unstable economy and the creditworthiness of their customers, these banks have been more cautious throughout the recession. Small-business loans tend to be risky and business owners often rely on personal and commercial real estate – the value of which remains down – as loan collateral.

Under Mr. Obama's plan, SBA 7(a) loans – the most popular of the agency's loan products – will be capped at $5 million, up from $2 million. Additionally, community banks can tap the TARP facility, which originally aimed to stabilize the larger financial institutions. Banks with less than $1 billion in assets can submit a lending plan that demonstrates how the TARP money will be directed to small businesses. Upon approval, these banks can access capital at a 3% interest rate, down from the 5% interest rate imposed on their larger counterparts.

Approximately $137 billion in TARP funds has not yet been allocated. But directing any of this money to small businesses will require a detailed recipe that must entice the lenders. "There's an illusion that it's free, but many banks have returned TARP money already because of its cost and restrictions," says Paul Merski, chief economist at the Independent Community Bankers of America in Washington, D.C. "There's a much greater risk to lending now than 18 months ago and to overcome the greater risk, there has to be an incentive."

In order to continue lending, Ridgestone Bank, which has two locations in Brookfield, Wis. and Schaumburg, Ill, took $10.9 million in TARP money at a 5% interest rate when the secondary market froze. "Small banks will find the reporting burdens to be rather excessive and the governance burdens are more than most community banks would enjoy," says Bruce Lammers, the bank's chief executive. "The devil is in the details. If it's a $5 million SBA loan, what will [be] the levels of guarantee and the fees?"

According to a senior administration official, tapping the TARP program would come with certain strings, such as executive compensation limits and warrants allowing the government to purchase common stock at a set price under certain circumstances. The official said the compensation rules aren't anticipated to be a deterrent for the smaller banks. But Mr. Merski says his constituency may be wary of the rules surrounding ownership stake.

The SBA and Treasury will be writing the fine print for the program. Mr. Obama has made it clear that the door is open to suggestions to make it viable, and ideas are already circulating among members of Congress.

Sen. Mark Warner (D.,Va.), for example, called the proposal a "first step." He says that the success of such a program would require a more substantial effort to make sure the banks allocate the TARP funds directly to small businesses - not to improve their own balance sheets. "There are different way to skin this cat," said the Senator, who suggested the creation of a $50 billion loan pool that would combine TARP funds, Federal Reserve loans and bank contributions that lenders could use to service small businesses. That idea has gained the support of about 30 other senators.

Jennifer Psaki, spokeswoman for the White House, said: "We look forward to working with members of Congress…on continuing to implement programs that will increase available capital to small banks and small businesses."

Others believe that the TARP program should not be pursued further, but should instead expire on Dec. 31, as originally intended. The price tag on Mr. Obama's program and the dates it would run have yet to be determined. But in September, 39 Republican senators co-signed a letter to Treasury Secretary Timothy Geithner, urging him to put the cap on the TARP program at the end of the year and apply any remaining funds towards reducing the federal debt.

Brian Carlson, president of Excel National Bank, says he's interested in hearing more details of the program. "We're profitable but many banks need capital assistance and the SBA programs are a great way to leverage capital," says Mr. Carlson, whose bank has one location in Beverly Hills, Calif. "The concerns we have are whether there will be any additional regulatory constraints or oversight and how easy it will be to return the money."