Forcing banks to lend to small businesses via the Troubled Asset Relief Program was simply never going to work, and now the evidence is in: on Tuesday, TARP’s special inspector-general released a report stating that bailed-out banks used about $2.1 billion of government largesse to exit TARP, instead of making those funds available to small businesses.

We shouldn’t be surprised by this. Banks operate to maximize profits for their shareholders, and making hundreds of thousands of loans to small businesses would have been much more arduous and costly than a single lump sum repayment of TARP. The banking sector’s profit motive is certainly no secret in the world of finance, and should be rightly lauded by good capitalists everywhere.

In fact, the high rate of bank capitalization, as of late, and low rate of lending to anyone, including small businesses—is not implicitly evil or untoward. To some extent, it’s due to the Federal Reserve’s decision to start paying interest on deposits. The rest is just normal behavior in an uncertain economy. Neither factor looks likely to change in the near future.

But banks aren’t the only source of capital for businesses. In an environment where they clearly don’t have any interest in lending, we need to look elsewhere for small business credit.

Enter our friendly neighborhood credit union. They operate as not-for-profits and their creditors are their members. This fact, that credit unions are beholden to their members, and not shareholders, informs a huge methodological difference in their approach to lending.

With the big mega-banks, CEOs and managers focus on the expectations of shareholders. Credit unions focus exclusively on the needs of their members. All “profits” are either paid out to members as dividends or reinvested for even more lending.

So, then, what stops credit unions from lending to their small business members? An arbitrary lending cap imposed in the 1990s, mostly at the behest of banks who were wary that competition would impede their profits.  Raising the member business lending cap (currently up for discussion in the House) would give small businesses immediate access to about $13 billion, or six times the amount of misused TARP funds.  It is an obvious fix, for a frankly untenable situation for small businesses in dire need of capital.

The government tried to provide a solution in TARP, which helped some of the banks, but didn’t help small businesses at all. Now let’s give credit unions a crack at it.