The announcement last week that the economy produced a meager 80,000 jobs in October makes battles over how to get the economy moving again all that more important, but on Capitol Hill, lawmakers have only just turned their attention to reviving a program that could, in relatively short order, pump billions of dollars into the hands of potential job creators: small business owners.
Right now, starting or expanding a small business and securing the necessary capital is on hold: Entrepreneurs don't want to bet the farm in a weak economy and banks are being cautious about taking any increased risks and don't want to lend to people without proper collateral. Federal Deposit Insurance Corp. data shows that both the dollar amount and overall number of small business loans held by U.S. banks rose inexorably in the 13 years leading up to the most recent recession. Since 2008, however, the number of small business loans outstanding has declined by 21 percent.
There is evidence that banks are willing to make those loans – provided they have an extra measure of security. The Small Business Administration (SBA) recently announced that it had backed $30.5 billion in loans over the past fiscal year, which represents the most in the six-decade history of the institution.
The fiscal 2011 numbers were buoyed by the Obama administration’s stimulus program, which included elements that increased the percentage of a loan that the SBA could guarantee and reduced fees associated with obtaining the guarantee. But that program has run its course, and until this week, there was no effort in Congress to revive it, despite aggressive lobbying by banks.
That changed Tuesday, when Sen. John Kerry (D-Mass.) introduced a bill that would revive the program by once again eliminating many loan fees and raising the guarantee to 90 percent.
“These efforts to provide access to capital and loans have helped keep more than 90,000 small businesses afloat in the last two years, and we’d be shortsighted if we stopped now,” Senator Kerry said in a press release. “This legislation will allow small businesses to keep creating jobs and contributing to the economy, and I’m hopeful that colleagues on both sides of the aisle will support it.”
The SBA program holds more promise than the Treasury Department’s Small Business Lending Fund, which came under heavy fire in Congress recently for disbursing only 14 percent of the $30 billion that Congress authorized. Unlike the Treasury program, the SBA’s programs need no help in getting off the ground, says James Ballentine, a senior vice president with the American bankers Association, which lobbied for the bill. Because SBA programs are a known quantity, he said, getting banks to participate in them is much simpler.
“The ABA has consistently supported this type of legislation and strongly believe that a temporary elimination of fees and higher guarantees would assist small businesses,” says Ballentine.
To be clear, while SBA guarantees helped push $30.5 billion in loans into the hands of small business owners, the SBA did not actually spend anything close to that amount of money. The SBA does not actually make the loans. It just guarantees them, which makes bankers more willing to lend. Because only a fraction of SBA-guaranteed loans go into default, a relatively small investment on the part of the government can be significantly multiplied in the marketplace.
The percentage of SBA loans that go bad is, or course, significant. The Coleman Report, which tracks SBA lending, estimates that 11.64 percent of SBA loans made between 2000 and mid-2011 resulted in charge-offs. But a charge-off rarely results in a total loss to the guarantor. Lenders still require collateral, which they can use to recoup some of their losses, and most borrowers will have been making payments for a substantial period of time before a loan goes into default. This means that a relatively small amount of money can safely guarantee a much larger amount of lending. The agency’s budget proposal for 2012 indicates that its 7(a) program—the largest of its loan guarantee programs—is expected to support $27 billion in loans at a cost of about $220 million.
And with unemployment still at 9 percent and the economic recovery sputtering, the benefit of getting more funding into the hands of small business owners is pretty clear. Because small businesses—particularly startups—tend to be fragile and don’t always survive, there is significant churn in the jobs they create. In fact, a study by the Federal Reserve Bank of St. Louis suggests that over the long term, large businesses are more reliable job creators than small firms.
But advocates point out that small and startup businesses have historically created a cushion of job creation at times when large companies are not hiring: during recessions and in their immediate aftermath. According to SBA data, it was small businesses that led the hiring surge when the economy came out of the doldrums of recession in the early 1990s, and during the recovery from the 2001 downturn.
“After a recession stops, small business hiring grows before large business hiring, but that is not happening right now,” said Molly Brogan, spokesperson for the National Small Business Association. A lack of funding is a major factor. While the SBA cannot solve that problem on its own, she said, increasing its lending authority can make a significant difference in the number of small businesses that are able to find banks willing to finance them.
The American Bankers Association’s Ballentine explained that the SBA’s willingness to provide guarantees against a certain level of losses—in exchange for a fee—can mean the difference between a small business getting a loan and being declined. Most community banks prefer to fund small business loans under their in-house lending standards, he said. But with the economy in turmoil and the future uncertain, many small businesses are simply unable to provide the assurances of repayment that a bank needs to justify the risk of lending to them. SBA guarantees, said Ballentine, give banks the ability to take a “second look” at small business loan applicants. That “second look,” he said, often results in approvals.
“It’s a good program,” said Ballentine. “It could do more and hopefully it will do more in the future.”