The stimulus plan: A year later
— By Rosalind Resnick. This article originally appeared on Entrepreneur.com —
Veronica Rose, founder and CEO of Aurora Electric, a Jamaica, N.Y., electrical contracting company, has spent nearly 20 years successfully bidding on government contracts. One of the first women to obtain a master electrician’s license in a heavily male-dominated industry, Rose has worked on major projects at JFK International Airport and the World Trade Center. Her seven-person firm boasts a customer list that includes General Electric, NBC and Columbia University.
So how much of the $787 billion in stimulus money that the government approved last year has ended up in Aurora Electric’s bank account?
“We haven’t seen any of it,” Rose said. “The stimulus money went to the big infrastructure companies that build highways and bridges–the bigger, deeper, heavier part of our industry where you have to be a big company in order to compete.”
Aurora Electric is not alone. A year after the government rolled out the biggest economic stimulus plan in history, small businesses like Rose’s are wondering where the money went and why so little of it came their way. While VC-backed startups like Tesla Motors, the Palo Alto, California, company that makes electric cars, got a $465 million taxpayer loan, most of the stimulus dollars have ended up in the pockets of big companies that employ thousands of workers, not the millions of small businesses like Rose’s that each employ only a handful. In fact, much of the stimulus money has gone to government agencies, bypassing the private sector completely.
According to a recent analysis by The Wall Street Journal, $112 billion of the $179 billion in stimulus funds shelled out last year went to state governments to plug the gaps in education, Medicaid and unemployment benefits budgets or to boost funding for food stamps and other social services programs. An additional $700 million was spent on administration, and about $47 billion went toward transfer payments, such as $250 checks for Social Security recipients. Some $70 billion in social spending is in the pipeline already, the Journal reported, including grants for local organizations conducting job training programs.
What’s more, ground has yet to be broken on many projects that were touted as “shovel-ready” as government agencies in charge of high-speed rail construction and electric vehicle initiatives struggle to get organized. Only about $20 billion was handed out for infrastructure projects in the first year of the stimulus plan, the Journal reported. Widely touted “signature” projects–such as $20 billion for doctors to create electronic medical records, $4.5 billion for an energy Smart Grid and $7.2 billion for broadband networks–are still in their early stages.
But while small businesses saw only a trickle of stimulus money last year, better news is on the way in 2010 and 2011, stimulus experts said. Deniece Peterson, manager of industry analysis at INPUT Inc., a Reston, Virginia, market research firm that analyzes government spending, said that roughly $6 billion of the $21 billion earmarked for businesses that contract with the federal government either directly or through a partner has been set aside for small businesses, defined by the SBA as businesses that employ 500 workers or fewer. Most of that money will go toward businesses in infrastructure-related industries such as construction, engineering, environmental services, and research and development.
“The industries that will benefit the most from the stimulus program are the ones that have the biggest job-creation impact and are aligned with President Obama’s priorities,” Peterson said.
One of the reasons why the stimulus funds have been slow to reach small businesses, Peterson said, is because much of the money went to state governments that have yet to parcel it out. While companies that work directly with the federal government should start seeing money faster, many of the federal projects are still tied up in red tape and could take a year or longer to get started.
“We’re seeing 2010 and 2011 as the years when the bulk of the money will start flowing,” Peterson said. “The government is actually doing a good job of spending the money quickly.”
But for small businesses in retail or service industries not related to construction or infrastructure, the stimulus package won’t offer much relief this year or next.
“The biggest losers of the stimulus program have been the traditional mom-and-pop businesses, and that’s been borne out by all the ‘For Lease’ signs along the main streets of America,” said Bob Coleman, editor of The Coleman Report and an SBA lending expert. Although the stimulus plan increased the SBA’s 7(a) loan guarantees to 90 percent of a qualifying loan and temporarily cut or eliminated fees, banks are still leery of lending to small businesses. According to a U.S. Treasury Department report released in January, the nation’s largest banks cut their small-business loan balances by another $1 billion in November 2009, marking the seventh straight month of declines. The banks’ total lending fell 4.6 percent in that seven-month period to $256.8 billion, the Treasury Department said.
“The banks are picking the winners and the losers,” Coleman said. “When you have General Motors and Chrysler in trouble, who can the bankers really trust?”
What about local car dealers who saw sales skyrocket last year when the government’s Cash for Clunkers program gave consumers up to $4,500 for their trade-ins? “All that did was accelerate future purchases,” Coleman said. “If you look at restaurants and hotels, there’s still too much supply compared to the weak consumer demand.”
If the majority of small-business owners are to see any benefit from the government’s stimulus program, however, it’s likely to come in the form of an increase in SBA-backed loans, which now appear to be on the upswing. Despite the big banks’ reluctance to lend to small businesses, the SBA’s 7(a) lending program guaranteed 12,393 loans for a total of $3.8 billion in the quarter ending Dec. 31, 2009, a 37 percent increase from a year ago at the height of the financial crisis. On Feb. 22, the SBA reactivated the queues for Recovery Act loan applications, the applications that were conditionally approved by the SBA while awaiting the availability of additional Recovery Act funds.
“We’ve seen some lending interest from banks this year, but the terms are more expensive and have made us cautious as we evaluate the best options,” said Sanjyot Dunung of Atma Global, Inc., a small New York City multimedia education publisher. “Even with personal guarantees and the SBA guarantee, it still seems that there are fewer options for firms in our industry.”
Dunung said she would like to see the SBA start lending directly to businesses, similar to the way the government runs its student-loan program. “This would make the process more streamlined, faster, and likely provide for better terms for firms like ours,” she said.
For small contractors like Veronica Rose of Aurora Electric, who had hoped for a shot at some stimulus money, it’s back to business as usual. Rose said her firm is currently working on a large government project she originally bid on in 2005 in addition to smaller projects for customers that her firm has been working with for years.
“It’s like the bailout,” she said. “Most of the money will go to the big guys.”