FOR ERIC FOGLE and his wife, landing a small-business loan for their athletic-field rehab firm was something of a victory. When the Troutdale, Ore., couple opened the doors of Valley Athletics last January, they thought they had everything they needed to impress a bank: a 30-page business plan, $50,000 in funds, plus a credit score of 752. But within 24 hours of making his case to two major institutions, Fogle received an unceremonious “no.”
It took several more attempts — and Valley Athletics turning a profit — to secure a loan from a small regional lender. The Fogles, however, were lucky. Many other business owners have been unable to secure loans of any size. Last year, lending across the U.S. economy fell 7.4% from 2008 — the largest drop since 1942, according to the Federal Deposit Insurance Corporation. Even with the economy seemingly on the mend, many banks are still operating within tightened conditions. According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, more domestic banks reported tightening terms on loans to small firms than did banks that offer loans to large and middle-market firms during the last quarter of 2009.
“The collapse of the [housing] bubble hit small businesses especially hard — first by limiting their access to credit, and second by sharply reducing consumer demand,” says Mark A. Price, a labor economist at the Keystone Research Center, a think tank in Harrisburg, Pa. Conversely, “larger businesses have better access to credit and are typically more diversified, and thus, better able to weather a recession.”
So what’s a small business to do?
Some say direct lending through the SBA is the answer. Currently, the SBA simply guarantees certain loans up to 90%. But a proposal recently passed by the House would establish a capital backstop program at the SBA to operate during a recession or when SBA lending falls by 30% compared to the prior year. Under the Small Business Financing Investment Act, the SBA would accept applications from businesses that are unable to find a lender in their area, and be authorized to make direct loans.
Rep. Nydia Velázquez, (D., N.Y.), chairwoman of the House Committee on Small Business, points out that the current SBA lending programs haven’t been updated in 10 years. The new measure seeks to bring the programs “in line with today’s realities,” she said in a press release. The proposal will better serve entrepreneurs, help more ventures launch and keep existing businesses operating, said Velázquez.
Yet, those efforts to pass small business direct lending programs have stalled. Launching such a program for small businesses would create a “massive bureaucracy,” said President Obama in a statement released by the SBA regarding the subject. “The SBA does not have the infrastructure to go all across the country in every region and process loans to small businesses directly,” he added.
The move would also be costly, says Jonathan Swain, a SBA spokesman. It could end up costing taxpayers up to 15 times what current subsidies cost, or, in other words, the cost of a program would weigh in at 15 cents per dollar lent, according to the SBA’s estimates. There would also be a spike in administrative costs, as the SBA projects needing 43 government workers to oversee every 1,000 loans, up from just two workers currently.