I beg to differ on both counts. Mark me as one who thinks this law is a huge step in the right direction and should do plenty to both help small business and spur jobs and growth.
There are two main parts of the act – a series of tax cuts and changes intended to spur growth, and a $30 billion fund designed to increase lending. It’s the latter that encourages me, and should encourage you too.
Before the economic meltdown in the fall of 2008, entrepreneurs typically funded their startups and growth plans using one or more of the following methods:
- They used credit cards and other available credit
- They refinanced their home
- They borrowed from friends and family
- They got an SBA loan
The problem is that all four have dried up to some extent or another: Credit cards got maxed out and closed, the home-equity ATM finally dried up, friends and family are tight for money, and SBA- backed loans became much harder to get due to cuts by the Bush administration and the tighter credit market.
As a result, small businesses have had a very hard time the past two years getting the money they need to start and grow. That’s where this law can and should make a big difference. The $30 billion fund for lending is going to significantly boost the amount of money available to smaller community banks for SBA loans. (The fund is earmarked for banks with less than $10 billion in assets.)
And that’s the beauty of the bill.
If you think about it, a loan for a new startup can’t get much riskier. There is no business collateral to secure the loan, no company history to go on, no accounts to leverage, nothing but a dynamic entrepreneur, a good idea, and a business plan. At one time, that may have been enough, but in the current economic climate, it is not, which is why lending dried up.
But the beauty of SBA guaranteed loans is that they make it easier – and less risky – for banks to loan money. If the borrower can’t pay the money back, the SBA will. (Note: SBA-backed loan repayment rates are nevertheless usually very good.)
By increasing the pool of available SBA money then, the government is creating the environment for banks to begin to loan again. Even better: The loans will not just go to established businesses with perfect credit, but also to smaller, entrepreneurial companies. The math looks like this:
More money + Less risk = More lending and more jobs.
Specifically, the law increases SBA lending in the following ways:
7(a) loans: The 7(a) loan program is the backbone of SBA lending. The new law extends (from the 2009 stimulus bill) the 90 percent guarantee level for 7(a) loans and the waiver of borrower fees. It also raises the maximum loan size from $2 million to $5 million.
7(a) Express loans: The law increases these loans from $350,000 to $1 million (for a year).
504 loans: The SBA says that these loans are for “long-term, fixed-rate financing to acquire fixed assets such as real estate or equipment for expansion.” The new law increases the level of funding here from $1.5 million to up to $5.5 million. It also changes 504 loans, for two years, to allow for some commercial loan refinancing.
Microloans. The law permanently increases the size of these loans to $50,000 (from $35,000). It also makes more microloan credit available to banks.
Intermediate loans: The law creates a pilot program for a new category of SBA loans. These will be loans for up to $200,000.
If we want to spur innovation, if you want small business to create more jobs, if entrepreneurs are going to lead us out of the economic doldrums, then this is what it looks like.
And it sure is needed.
For more information on business financing, check out my new book available this spring, Get Your Business Funded: Creative Methods for Getting the Money You Need. John Wiley & Sons.