Financial Resource

At the end of September, Congress gave President Obama a bill ostensibly designed to help small business loan programs and small business lending. The bill, which had been hotly contested by Republicans throughout the year, was a drastically pared down version of a proposed bill at the beginning of 2010.

The real question is, does this bill really assist small business get the working capital they need? In theory, the bill nurtures small business lending via the Small Business Administration guaranteed loan programs. Normally, these programs guarantee anywhere from 50-70% of a small business loan against default for the lending institution that makes the loan. The new bill raises this guarantee to 90% in some cases, theoretically lowering the risk of default and putting community banks in a better position to take on these loans.

However, whether this helps or not is a matter of heated discussion. The problem is not that banks do not have the capital to lend. With all the government stimulus that has been targted at the banking system, financial institutions are flush with cash. The problem is really one of perception, attitude, and outright hard facts. Whereas three years ago, banks were lending with impunity and making bad loans to business, they have now over-corrected, obviously made cautious by the harsh default rates and bank failures of the last few years. It is a classic ‘”standoff” situation, where everyone from large banks, community banks, businesses and consumers are waiting to see who will make the first move in beginning to loosen loan approval requirements and spending habits.

Likewise, businesses are waiting to see when consumers will feel confident enough to purchase the goods and services that their businesses have to offer. Consumers are waiting to see when there financial situation will stabilize enough to begin their spending. So in the meantime, everybody continues to wait, and the uncertainty drags on. Unfortunately, no ‘small business” bill that can fully address this perception.

Making it easier to utilize small business loan programs and making it less risky for banks to lend is one thing, but the government cannot force banks to make loans to business. Added to this fact is that banks are more concerned of ever over tight oversight that has been imposed since the financial crisis began, worried that even a small uptick in defaults will result in federal regulators sitting in their offices for months on end, sifting through every detail of operations in effort to find wrongdoing or bad management.

The bill also provides a series of targeted tax breaks for small businesses, specifically directed at abating payroll taxes for hiring new workers,the ability for Alternative Minimum Tax businesses to claim the R &D tax credit, and tax cuts for restaurant owners and other small businesses who chose to renovate or build new facilities. Certainly tax cuts are always welcome, but in this case they only really apply if a business is planning to spend additional money on hiring, expanding or doing R &D.

Small Business Loan programs are not in short supply. What is in short supply is the proper volume of customers to make approval for such programs a reality for small business seeking working capital. Until the perception of risk changes for consumers, this problem will be a difficult one to eliminate, no matter how many pieces of legislation are passed

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