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.

9 comments

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My small business does not need your help. Why do you think your losing business deserves my money? It is just ingrained in deadbeats I guess.

Posted by kelly p | Report as abusive

In lieu of loans, I suggest special corporate tax incentives for each unemployed person hired for at least a 12-month period.

We can help everybody by having a daring program of guaranteed apprenticeships for each person, regardless of age or background, who needs or would like training albeit at low rates. We are pouring public money into all sorts of companies. So let’s not have any garbage about government training programs being some sort of leftwing conspiracy. Get the people trained and let them start their own companies. Do not rely on the private sector to train people because this cut-throat competitive environment is hostile to employee training.

However, in terms of lending out money to worthwhile ventures, I think the government should create its own VC fund. People contributing should get generous tax incentives. Maybe somebody wants to build a highway or upgrade a building. Force them to hire an apprentice or unemployed person as a condition of funding. We need more skilled people to make buildings energy efficient. Pinheads only understand numbers. Don’t let them get near the money. Create a panel of community colleges, industry representatives and government liasons to co-ordinate disbursement programs. The structure is already there in a way.

Is there some kind of shortage of ideas here? Wind mills, natural gas micro-turbines, reforestation, building upgrades, roads and highways, remediating contaminated sites, solar heating, bioassay indicators, methane landfill reclamation, virtual interface goggles and gloves, whatever . . . We just have to make sure that funds are not being tied up with sunset industries. We all use lightbulbs. But there’s no money in making lightbulbs. The Chinese can do that for us. That’s a sunset industry.

Posted by Don | Report as abusive

Cut taxes for successful business by the same amount that you want to give away their tax money to loser businesses, and you will get much better results.

Posted by kelly p | Report as abusive

The banking system in this country is like a dead fish. It stinks from the head first. So, chop it off. Putting tax payer dollars into failed institutions run by thieves hardly seems prudent. Reportedly the federal government runs the bank’s day to day operations anyway. However thieves will still steal. President Obama effectively fired Rick Wagoner. Why didn’t he fire CEOs from all the banking institutions that collapsed under the weight of their own greed?

At the end of the day this won’t help small business. the fact remains there is no money to be loaned. The federal government is issuing treasuries to support it’s deficits. This has soaked much of the money that is out there. The Fed printed the rest and bought more treasuries while buying some back. It is clear there is no voice for small business, those without healthcare and “Bushville ((tent city) residents.

Posted by Anubis | Report as abusive

when it comes to current global crisis, what is the biggist cause of its crisis is ignorance caused by greed

preident obama should take account of various ways to tackcle economic meltdown.

small besinesses are inportant sectors of US economy in terms of interdependent communication.

If US government dose not care about small besinesses, they will repend what they lost lots of basis of economy when recover its ecomomic

Posted by sung | Report as abusive

As far as I am concerned the Feds and the banks can keep their money. When we decided to open another store (we sell need items) with 50% down, the bank(s) asked what assets we had other than inventory. Ummmm…banker moron…what major asset does retail have other than inventory?
While we could stretch and pull this off, with Obma at the helm we have decided to do nothing as whatever additional income we generate will no doubt be grabbed by him and mexi/Pelosi.

Posted by NickP | Report as abusive

A major problem for small businesses is lack of working capital. The only answer the feds have is to make loans available through the SBA. That won’t help. The last thing I want to do is borrow money because I have to sign personally for business loans. I would rather cut expenses and my number one expense is payroll.

The answer is for the feds to stop taxing small business working capital. That would save hundreds of thousands of jobs. Only tax me on what I take out of my company in salary and dividends. That would ensure that I could build up working capital in good times so that I wouldn’t have to lay off employees in bad times.

In case someone who is reading this doesn’t understand how the feds tax working capital, here is an example:

Company A
Sub S Corporation
Gross revenue: $2,000,000
Net Profit: $300,000 (15%)

Owner X
Salary: $100,000
Taxable Income: $400,000
Income Taxes: +/- $100,000

Where does the $100,000 come from? Owner X has to draw money out of working capital. To be consistently successful, a small business needs 6 months or more of working capital, but the feds. The lower the working capital the more expenses have to be cut in hard times. The number one expense for most small businesses is payroll.

Understand that the owner is not actually receiving any of the $200,000 net profit. And next year net profit may be negative.

Posted by Pat Conroy, Austin, Texas | Report as abusive

But Cash is king. Borrowing for a startup or expansion may be required at first but the goal should be to pay that off or reduce debt and put cash in the bank. We have a hard time doing that under current tax laws. Enable savings by allowing income to be saved rather than to be paid out to the government to increase social programs.

Borrowing is at best a short term solution not the answer. The current administration says that the people voted against the old way of lower taxes being the path to prosperity.

Maybe they did, maybe they just were reacting to wanting a change. Change can go both ways. I do not think you can stimulate job growth by raising taxes and regulations.

If you can shift resources and create a benefit than a tax may be beneficial. For example if taxes are raised to pay for a more efficient health care system and your health care costs go down more than your taxes are raised you have a winner. If the health care costs do not go down more than the tax increase you have an impairment to jobs and growth.

I think we should ask for a positive cost benefit analysis on all programs and taxes prior to their consideration and certainly before they are adopted. Hope can mask all kinds of results. Lets demand mathematics.

As a small business owner I would rather expand using my own cash rather than be tethered to the banking system. I felt a huge shift in my ability to save for expansion and to survive downturns when the income tax averaging was limited quite a few years ago. My business has huge multi year swings in profitability.

I used to be able to put profits in the bank in big up years by using past losses from 5 years to average my income and pay a reasonable tax in the few big up years. Now when I have a big up year I have to pay huge taxes on it, and there just is not the cash left to put in the bank to save for expansion and to use in down years like I am experiencing now.

I also cannot deduct for real expenses in a current year if they are required to be capitalized over the life of the asset. This creates a large cash outflow, and no tax credit for the real expense. I then have to pay taxes on outflows.

I would like to see a change back to 5 year income averaging, and some changes in the rules for capitalizing expenses. Then I can motivate myself to create jobs by seeing some reward for my risk.

Comments?

Posted by B. Smith | Report as abusive

[...] The Great Debate » Debate Archive » Small businesses need bold … [...]

I feel this to be true!
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.

I am a single mom, taking care of my 2 grandson, since my daughter has passed away in 2005. I have been on disability for 5 years now and I am in need of a better income. I have a business plan for a Bed & Breakfast, Coffee/Deli. I have 2 adult sons that will be helping me with this family business and I would like to have it completed for the 2010 Winter Olympics. I need help with start-up (Seed Money)10% = $100,000. I live in Blaine Wa. and working with SBA for financing, I want to build ‘Green’. The Value of my home/business will be a bonus. This will be great for our eco, I have a number of contractors that want the job. I plan to have an income of $100,000. to $200,000. or more, in the first 3 – 5 years. If I can make the Olympics, the first month of opperation I will make my yearly mortage payment. I have the go ahead with the city, everything is on hold because of the need for funds, if you would like to invest or know of an Angel Investor, I would appreciate the help. thank you for any info.

Posted by Katherine | Report as abusive