When the Obama administration started work on a massive stimulus bill to revive the economy, it remained to be seen how strongly the new president would focus on small businesses.
Judging by the proposals now taking shape in Congress, it appears small firms will get half a loaf, which is always better than none. But will it be enough to bring relief to this all-important sector and jump-start the economy? Already, it seems, some groups are sowing the seeds of disappointment.
“Unfortunately, the bill under consideration provides little relief or incentives to small businesses,” said Dan Danner, president and chief executive of the National Federation of Independent Business (NFIB), in a recent statement. Supporting the half-a-loaf analysis, he notes that small business provisions in the bill are a “good start, but in the current economic climate this is not enough.”
Numerous studies over the years have found that small businesses and startups create anywhere from 60 percent to 80 percent of all new jobs, which is something the economy desperately needs right now. To create jobs, however, small businesses need access to capital. It’s the life-blood of any new, or growing business.
But small business lending is deteriorating rapidly in the current downturn, and it’s an open question whether the administration’s half-a-loaf proposals will adequately address this critical area of need.
Recently, Sens. Mary Landrieu, D-La., and Olympia J. Snowe, R-Maine, the chairman and ranking member of the Senate small business committee respectively, called on the administration to provide more help. They were stunned by the latest Federal Reserve survey of senior loan officers at banks nationwide. It found that 70 percent of domestic banks had tightened small business lending requirements.
That’s down only 5 percent from last year, even though the government has spent almost $350 billion so far capitalizing banks in hopes that they would increase lending. “[The] latest Federal Reserve report confirms the dismal state of our economy, with banks tightening their lending practices at a troubling rate,” said Snowe. “It is critical that the stimulus legislation the Senate is presently considering include significant assistance to augment small business lending.”
As the two senators note, small businesses in the past could turn to the Small Business Administration for loans when banks tightened credit during downturns. But the SBA has been so decimated by Bush administration policies, it is having trouble filling that role now. Lending through the SBA’s flagship 7(a) loan program, which provides working capital, and its 504 program for real estate, is down 57 percent and 45 percent respectively compared with last year.
Part of that decline is certainly due to falling demand. But there is no question small businesses are under stress. The SBA says it is racking up mounting losses from loans made through its lending programs, as small firms struggle to make payments or go out of business. Loan losses more than doubled last year, topping out at $1.3 billion compared with $504 million in 2007 and $276 million in 2005.