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After reading a variety of blog posts, talking with a Professor of Finance, and the President of the Independent Community Bankers of Minnesota, my reaction to the proposed $30B stimulus for small business loans is sadly: "money, money everywhere, and not a dime to keep."
Ouch. In his State of The Union address last month, President Obama pledged to make it easier for small businesses to get loans, so they could increase productivity and hire new people. The plan is for the federal government to loan or give community banks $30 billion dollars. The source of that money would come from repayments the federal government received from the TARP loans it gave big banks as part of the bailout.
A clean, simple concept. Unfortunately, the experts are saying the issue is too complex, and the chances of the small business stimulus having the impact the government would like are slim to none.
Here are six reasons why the experts say, this small business stimulus will hardly make a ripple.
1. Community Banks Already Have Plenty of Money To Lend
David Vang, Professor of Finance and Department Chair at the University of St. Thomas in St.Paul, MN says that when the financial crisis began many of the community banks off-loaded their risky mortgages to the secondary markets. Professor Vans says community bank debt ratios are decent, and he adds, "they've been putting excess funding into government securities, as opposed to loaning out money." Vang believes if the federal government gives the money to community banks, many might just put that money into more government Securities.
2. Harsh Regulatory Environment Doesn't Invite Many To Ask For Loans
So the banks have the money and the executive branch of the government says it wants to make the money available, sounds great. There's just one pesky problem: the people on the ground -- those bank regulators-- have different marching orders. They were told, in no uncertain terms, to make it harder for banks to give loans. And so, while the pendulum has been swinging, from those crazy carefree, easy credit days to a newer harsh regulatory environment, money in banks is untouchable to most small businesses. The experts say unless credit criteria is eased, few small businesses will come asking for the money because banks are very conservative when it comes to handing out loans.
3 Small Businesses Are Not Eager to Get Additional Credit
Okay, so there is a distinction here. Small business owners who need an influx of cash for survival would certainly welcome any money that any source would throw their way. But, businesses on the brink of disaster, usually don't qualify for a bank loan. Banks need some evidence that the business can repay a loan, and do that the business has to demonstrate it has customers who are going to pay for their services. As Hamlet liked to say," Ah, there's the rub."
Marshall MacKay, president and CEP of the Independent Community Bankers of Minnesota explains, "Banks are seeing a decline in requests from borrowers. Community banks do the majority of funding for small business, and they(small business owners) are as conservative as the small community banks." MacKay says that when small business evaluate the economic conditions and consider whether to get a business loan to buy a new truck or hire employees, they ask themselves, " How am I going to repay that loan?"
MacKay says right now,"They are hesitating"
4. Small Businesses Don't Have The Same Collateral They Used To Have
Typically, a bank is not going to give a small business a loan simply based on the belief that the small business owner thinks nice thoughts. Collateral is usually involved. Until very recently, many small businesses could use their office buildings as collateral. Just as the housing market has tanked, commercial real estate is in a death spiral of its own shrinking the collateral options once available to business owners.
5. Political And Economic Uncertainty
Professor Vang says business owners are not likely to take out business loans when they are believe the rules surrounding how business is conducted may be changing soon. Right now there is a lot up in the air. On the domestic front, there are major pieces of legislation, which, if passed, will have a major effect on how business is conducted. Think health care. Think the proposed cap and trade program for greenhouse gas emissions. Then there is the problem with the Euro. Not only does Greece have debt problems, but Ireland, Spain and Italy have also raised their debt hands as well. Says Professor
