First 100 Days: Do not marginalize small businesses
— George A. Cloutier, a graduate of Harvard Business School, is the founder and CEO of American Management Services, one of the nation’s largest turnaround and management services firms specializing in small and mid-size companies. He is also the author of the upcoming book, “Profits aren’t Everything, They’re the Only Thing.” The views expressed are his own. —
Why are the Obama Administration, Congress, and the Senate marginalizing the nation’s largest industry in the new stimulus plan?
Small Business Inc. employs about 60 million people, accounts for 70 percent of new jobs each year, and clearly represents the backbone of almost every regional and local economy. For this vital industry, the administration has allocated less than 1 percent ($700 million earmarked vs. $1 trillion in proposals). The nation’s leaders continue the small business program of the Bush years: talk a lot and do practically nothing.
The sponsors of the bill, most likely to succeed, say that small business will benefit indirectly from the spending programs. This is the same discredited thinking of Reagan’s “trickle-down” economics.
Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and Lawrence Summers, director of the Economic Policy Council, have absolutely no experience with small business.
They have no idea what it’s like to not meet a payroll, have no money because collections are slow, and to be able to only pay a fraction of their bills to stay in business.
Approximately 12,000 small businesses will close their doors every week this year. The Obama administration says it cares about the little guy, but what they should say is that they care about the little guy except for those who own small businesses.
The current proposed stimulus bill offers $630 million to support the loan guarantee program of the SBA, although the SBA’s two largest business loan programs were down 40 percent so far this year and over 30 percent last year. The proposed bill fantasizes that by cutting the loan fees to small business, volume will skyrocket. Loans are down because banks don’t want to take the risk on marginal credit with only a 75 percent guarantee from the government.
The stimulus bill includes various minor tax cuts for small business, as well as additional depreciation and write-off incentives. Of course, these benefits can’t be collected until at least 12-15 months from now in 2010, when small businesses file these tax returns – assuming of course that they made any money in a widely-acknowledged terrible year for small business. Stimulative effect here is, in fact, probably near zero.
And what about the approximately 600,000 plus small businesses that will fail this year, and the millions of businesses that won’t make a profit?
President Obama has continually said he and his administration wants new ideas so let’s see if they are listening. Here are some honest proposals that bear consideration:
1. The stimulus package should immediately allow $25 billion in direct loans to small business, bypassing the recent history of declining bank-guaranteed loans to make sure that the money gets quickly and efficiently to small businesses. Small Business Inc. will never be a gold-plated borrower and the bill must make allowances for this, by broadening the loan criterion ensure the great majority of small businesses are eligible.
Small business loans are no less risky, when we look at the current situation, than those that have already been given by the government and Federal Reserve to the likes of Citibank, Bank of America, AIG, the auto industry, etc.
2. The current SBA bank loan guarantee program should be altered to a 100 percent guarantee by the government rather than the current 75-85 percent allowed. This guarantee program is down 40 percent not because of the fees involved but because the banks are risk averse to losing 25 percent on marginal loans that are costly to collect anyway.
If you and I were running a bank we would not like this program and we would attempt to marginalize it, which is what is actually happening in the marketplace. Actually, the government should pay increased loan fees to ensure that the banks get solidly behind the program.
Small businesses would willingly pay the bank’s fees if they could secure the money they need. For example: right now the fastest growing service offered to small businesses is “merchant advances.” These are small loans made at interest rates of anywhere from 30 percent to 250 percent by legally organized companies. These companies make payday lenders look benign.
3. The SBA budget should be increased fivefold to $3 billion and emphasize management assistance and serious outreach to small business. In surveys we have conducted recently, less than 10 percent of small business owners understood the loan programs offered by the government.
4. There are many other stimulative programs that can be offered including technical assistance, a Small Business Peace Corps, broader and better enforcement of set aside programs.
5. The Federal Reserve should be directed and empowered to make loans to small businesses at 2 percent to 3 percent, which is currently being charged to the mismanaged Wall Street companies.
The Obama Administration repeatedly asks for proposals. They say, “Yes we can!” Small Business Inc. asks, “But will you?”