On Monday, March 16, 2009, President Obama announced a new plan to help small businesses. (Announcement here - PDF.)
The plan is mainly centered around easing SBA loans. The plan calls for the government to buy up SBA loan securities to free up the secondary markets so banks can sell their SBA loans; it cuts SBA loan fees; and it increases the Federal guarantee on SBA loans to 90%. It also calls for the 21 largest banks getting Federal funding to report on their volume of small business loans each month. The rest of the announced provisions for the most part were already included in the Stimulus package and not new.
So: thumbs up or thumbs down?
I’d say the plan is mildly positive, but mostly it’s just not relevant to the majority of small businesses. Here’s why:
To the extent small businesses actually want SBA loans, this could help. However, not every small business wants or needs a loan. Demand for small business loans is down significantly, according to the U.S. Treasury. As Dawn Rivers Baker noted here not long ago, lack of loans is not what ails many small businesses. In times when the economy is down, going into debt doesn’t necessarily look all that attractive. Battening down the hatches to get through to better times in the economy, does.
The Small Business and Entrepreneurship Council makes a similar point — saying the President’s focus on SBA lending merely helps on the margins:
“While these may help some small businesses that are in a position to borrow money, many small firms are not in sound financial shape or don’t feel it is prudent to increase their debt during the rough economic period.”
Consider, also, how few small businesses actually get SBA loans. For instance, as this Washington Post article reports, SBA loans counted for just 4% of loan volume for small businesses in 2006.
More SBA loans are not a cure-all for every small business — although you would hardly know that based on some reports. For instance, this article on Forbes.com is bizarrely titled “Small Business Loves Obama’s Plan.” However, there are no small business owners interviewed in the article. The title makes it sound as if small business owners spontaneously erupted in applause in favor of the plan. Wishful thinking perhaps … but not what the article says … nor the real-world reaction.
On the other hand, that’s not to say small businesses are against this latest plan, either. I don’t hear small business owners jumping up and down screaming it’s a bad thing. It’s just … not relevant enough for most to care.
However, that said, for the relatively small percentage of small businesses who do need SBA loans in order to hire or operate, and for whom other funding sources are not sufficient or not available, this is welcome news.
The plan also calls for reporting monthly on how much lending is being done for small businesses. But Scott Shane, who also writes here at the OPEN Forum, is quoted in a USAToday article as questioning that provision:
The 21 largest banks getting government financial help will be asked to report monthly how much money they lend to small businesses. This helps “increase transparency and accountability,” Geithner says.
While programs that help a small business “save cash or borrow more money will be helpful,” parts of Obama’s plan don’t make complete sense, says Scott Shane, author of The Illusions of Entrepreneurship.
“I don’t see how making banks tell the government how much they’re lending is doing anything but generate more paperwork for the banks,” he says. He also worries about previously announced tax increases on those with high incomes, many of whom run successful small businesses.
In the end, most small businesses that I know will continue on their way, working to get more sales, not waiting for bailouts and probably not in the market for SBA loans.
In my view, the biggest impact of President Obama’s plan will be symbolic. The improved tone in the Administration of late, sounding more positive, is a welcome move. That may do more to restore confidence in the economy, which is what businesses need, than the SBA lending provisions.
And if this opens things up even a small crack — makes the public and small business owners and the lenders who serve them even a little more confident — then conditions for small businesses may start to improve. It won’t be because of what’s in the plan, but simply because small businesses are being given a little attention and the tone is turning more optimistic and “can do” rather than constantly comparing today with the Great Depression.