Small businesses need bold, flexible relief package

March 30, 2009

- Lesia Bates Moss is president of Seedco Financial, a subsidiary of Seedco, a national nonprofit organization that helps low-income people and communities move toward economic prosperity. Any opinions are her own. -

As policymakers in Washington work to unfreeze the credit market and reinvigorate lending activity, much of the attention has fallen on the biggest lenders and the needs of major companies.

But on Main Streets across the nation, small businesses have also been hit hard by the recession and credit crunch. Unable to obtain affordable capital – and often in need of technical assistance to help them survive the financial tumult – many small businesses are closing their doors and laying off workers.

President Obama has proposed some important steps to address the small business credit crisis. His plan creates incentives for banks to lend to small businesses by expanding loan guarantees and purchasing up to $15 billion of Small Business Administration-backed loans through the Troubled Assets Relief Program.

But a small business rescue package should include a large infusion of capital that puts money directly into the hands of small businesses. In addition, resources should support the activities of community development financial institutions (CDFIs) and other alternative lenders who provide a range of financial and technical assistance services to small employers left reeling by the downturn.

“Crisis on Main Street,” a new report by Seedco Financial, the New York-based, nonprofit CDFI, summarizes the small business credit problem. The report notes that 75 percent of domestic banks have imposed tighter restrictions for loans to small businesses; and the SBA backed 68 percent fewer loans last October than it did in October 2007. Overall, only 28 percent of small businesses are using bank loans, the lowest rate since 1993.

Even in the best of times, the capital market available to small businesses is insufficient. Banks depend on rigid formulas to assess the risk of potential borrowers, considering measures such as number of employees, financial performance records, and credit histories. Most small businesses, and especially the smallest ones, are deemed too risky under these criteria.

These small businesses are shut out of bank lending and have limited options. Many owners end up borrowing funds from family and friends. This works for many businesses, but such loans are not consistently available to all entrepreneurs, especially low-income and minority business owners.

Most businesses unable to qualify for prime capital market loans turn instead to high-cost products offered by credit card companies and “predatory” lenders of the sub-prime capital market. In 2002, small firms borrowed $140 billion from credit card companies to meet their capital needs; that amount was expected to grow to $350 billion in 2008. And it is estimated that all types of borrowers – small businesses and individuals – annually incur $4.2 billion in fees on payday loans. Such fees help trap many small businesses in a cycle of debt that too often leads to layoffs and, eventually, bankruptcy.

A third option is the alternative sub-prime capital market that seeks to serve small businesses unable to access the prime capital market, offering rates and terms similar to those of banks.

But even before the recession hit, this alternative market failed to meet the full capital needs of small businesses, issuing an estimated $1.6 billion small business loans in 2006. With banks and other prime lenders now focused on making only the least-risky loans, more and more small businesses are being shut out and left to rely on the inadequately funded alternative market.

The market, which includes a well-established network of CDFIs and community development corporations, must be bolstered with new capital.

A small-business relief package must also include funding that allows alternative lenders to actually deliver capital to more small businesses. New funding is needed to cover administrative and loan-servicing costs, which will allow high-quality lenders to offer more affordable financing to small businesses.

Finally, we have to do more to provide small businesses with comprehensive business services customized to their individual needs, including help with financial planning, debt management, and loan restructuring services for businesses with loans with unfavorable terms.

Utilizing capital effectively takes skill and savvy and technical assistance should be offered in tandem with loan services as an integral part of a small-business recovery plan. These services could be provided by a range of organizations, including CDFIs and credit unions. The president’s small business package includes modest funding for such technical assistance; much more is needed.

Small businesses across the country need a response that is equal to the current crisis. In New York after 9/11 and in New Orleans after Hurricane Katrina, government support helped to expand the alternative lending market’s capacity to serve small businesses in need. Seedco Financial and other CDFIs played a major role in assisting small businesses in the aftermath of both of these regional crises, helping thousands of small firms and saving thousands of jobs.

Today, we’re facing a national crisis, and the federal government must mount a similarly aggressive effort to help small businesses grappling with the economic crisis. A bold, yet flexible response that meets the individual needs of small businesses is our best hope for helping these firms recover, allowing them to preserve the jobs they provide to their employees and the stability they provide to their communities.

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