Wall Street Journal
March 4, 2010
Small businesses want a more direct line to loans.
Most recovery efforts directed at Main Street have required participation from cautious lenders, but with credit still tight, small companies say they haven't received the same treatment as large corporations.
Small businesses have been pleading for government aid since American International Group Inc., General Motors Co. and scores of banks received bailouts.
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"Would you call volunteers or an army if you need emergency aid," he asks, alluding to the fact that the situation requires solutions on a government level and that the banks are under no mandate to participate.
This legislation calls for the Small Business Administration to help business owners find willing lenders and, as a last resort, issue the loan directly. While this provision passed a House vote in October, the direct-lending provision has an uncertain future as it awaits consideration from the Senate, given the fruitless history of similar past proposals and skepticism from the Obama administration.
The SBA currently has loan programs in place that work through banks, guaranteeing as much as 90% of the lenders' small-business loans against default. In 2009, these guaranteed loans were down 37% compared with two years earlier.
The SBA only provides direct funds to companies in geographic areas that are hit by natural disasters. When he was on the campaign trail, then-Sen. Barack Obama proposed expanding that disaster program for businesses hit by the economic turmoil. A similar concept passed in the House version of the stimulus bill but was eventually cut from the final version.
At a town-hall session in Tampa in January, Mr. Gordon asked President Obama why the SBA wasn't already lending directly. The president, in his response, said that the SBA "does not have the infrastructure to go all across the country in every region and process loans." He added that creating a direct-lending system would make a "massive bureaucracy."
Mr. Gordon on Friday testified at a congressional hearing that addressed whether a recently announced $30 billion initiative from the Troubled Asset Relief Program, or TARP--originally proposed to help community banks make more loans to their neighborhood businesses--would be better spent by the SBA to lend directly. "I went as a messenger," Mr. Gordon says. "They [should] not give banks another dime of money."
Rep. Nydia Velázquez, (D., N.Y.), chairwoman of the House Committee on Small Business, has been a strong proponent of the legislation. In conjunction with Mr. Gordon's sentiments, Ms. Velázquez says that "given the public's view of TARP, there is little appetite left for proposals that cut more checks to banks."
Representatives from both parties, including those who voted in favor of the legislation, are concerned that the American taxpayer will have to pay for defaulted loans. Proponents of direct lending argue that taxpayers are already on the hook for 90% of that loss through the SBA's guarantee programs. Yet, some historical data from the SBA indicates that direct loan-loss rates tend to be higher than those of guaranteed loans.
"The more you look into [direct lending], the more you realize the challenges and consequences it presents. If businesses are being told 'no' because they are not creditworthy and lenders won't make the loan with a 90% SBA guarantee, why should the taxpayers do it with a 100% guarantee," says Jonathan Swain, an SBA representative, in a recent interview.
Ms. Velázquez, however, points to several indicators that show the momentum of the direct-lending proposal. Trade groups such as U.S. the Women's Chamber of Commerce have called for such a program, and separate legislation with direct-lending provisions have recently popped up in both congressional chambers, she said.
SBA has attracted more than 1,000 banks and other lending partners to its guarantee programs in the past year. It fears that setting up a direct-lending system could foster competition between them and the government and could hinder small businesses from developing a solid relationship with a lender.
SBA administrator Karen Mills has said that it could take a year before staffing, training and back-end computer systems are in place to manage any form of direct lending beyond what the agency already does in disaster scenarios. That would be too late for some struggling businesses. As an alternative, Ms. Mills suggests focusing on existing programs, such as utilizing the services of the SBA's advisory network.
"We can get them bankable by helping them with their package," she said at this past Friday's hearing, referring to the owners' business plans and other necessary application materials required by lenders.
Mr. Gordon, who wants to hire more people and launch a new marketing campaign for his business if he gets a loan, says that he isn't in favor of bigger government but that direct federal assistance is necessary when the free market fails. "If [the government] doesn't lend money, then it will pay for unemployment compensation, which is money you will never get back," he says.