"Small Business is the Heart of the American Economy" is how President Obama referred to small business in his speech on March 16. The President outlined a plan to increase liquidity in the secondary market for Small Business Administration (SBA) loans by using a portion of the TARP funds to purchase SBA loans from banks. This would allow banks to make loans, sell the loan on the secondary market and use the funds they received from the sale to make more loans. This is critical. As I have said before, banks need incentive to lend. Increasing access to the secondary markets, increasing SBA guarantee levels to 90 percent and reducing fees could provide some incentive to banks to increase lending. Having said that, the reason that some banks are in trouble is not due to the activity of the small business commercial lenders. There are credit and underwriting standards that must be met for banks to make commercial loans. These underwriting guidelines have tightened not because the banks don't want to lend but because the economy has worsened. Banks employ calculations that show that a certain percentage of businesses will fail at various levels along the continuum of scores. More businesses, even if they have spotless credit, are falling into the danger zones of default within the bank calculations. This is why credit lines and loans are being called. While the President's plan is certainly a step in the right direction, the economy must improve in order for banks to begin lending again.
In a Wall Street Journal article on the President's proposal (U.S. Proposal Aims to Aid Smaller Companies) the primary criticisms of the plan are that many firms don't use SBA programs to obtain capital and that the plan does not do anything to support high growth technology firms who typically are unbankable in their early development due to lack of hard assets. I think both issues are valid but the President's plan is a good first step using one tool that the federal government has, the SBA, to begin loosening credit. Next steps for the administration should be to look at ways to increase "cashflow" within the business. Part of the answer will be found by addressing the rising costs of healthcare coverage and tax policy. Both have significant impact on cashflow.
As it relates to high-tech firms a possibility is to institute programs at a national level similar to the Ohio Technology Investment Tax Credit program (OTITC) and the Innovation Ohio Loan Fund. The OTITC program provides a 25 percent tax state credit on private equity investments by individuals who invest in Ohio companies. The Ohio Innovation Loan Program looks at a variety of possible forms of collateral, anything that can be capitalized under Generally Accepted Accounting Principles (GAPP) which allows tech firms to secure loans. I have seen both programs increase access to funds to clients we work with and I'm sure that if implemented on a national level would have a positive impact on the growth of the small business sector.
