U.S. Proposal Aims to Aid Smaller Companies

Wsj.com’s Simona Covel and Kelly K. Spors wrote this article.

The small-business community gave a lukewarm reception to the U.S. government’s new plans to unlock tight credit, fearing the proposal targets just a small segment rather than aiding a much broader swath of businesses.

Monday, the White House announced that the Treasury Department will begin making direct purchases of securities backed by Small Business Administration loans, part of a multipronged effort to unclog the flow of credit to small businesses.

The small-business community — which employs about half of private-sector workers — has complained that it has been left out of a massive bailout plan that funnels money to big businesses in troubled sectors like banking and auto manufacturing. Making matters worse: The number of loans guaranteed by the SBA has plummeted, as banks have clamped down on lending and the secondary market for SBA loans has frozen. At the current pace, this year’s total of SBA-guaranteed loans is likely to come in under $10 billion — about half the volume of previous years.

Associated Press 

President Barack Obama signs a book after addressing small-business owners and others at the White House on Monday.

The Obama administration’s new plan, small-business experts say, should help companies that rely on the SBA for funds and generally qualify for bank loans. But many small businesses never apply for an SBA loan. That’s particularly true for high-growth technology companies that may start out with little in the way of tangible assets to use as collateral. Those companies contend that lower taxes, incentives for hiring employees and encouraging private-equity investment are a better way to spur growth.

“There are just too many really innovative entrepreneurial companies that just don’t use the SBA,” says Tim Kane, an economist at Ewing Marion Kauffman Foundation, a nonprofit in Kansas City, Mo., devoted to expanding entrepreneurship. Mr. Kane would prefer the administration find ways to aid high-growth companies that create jobs, such as enacting a payroll-tax holiday.

Gabe Zichermann, the founder of New York-based rmbrME, a mobile-software start-up with three full-time employees, says his company won’t be helped at all by reviving SBA lending because he doesn’t plan to take on debt to help the company grow.

“The SBA is organized to run an industrial type of start-up,” Mr. Zichermann says. “Most companies like ours don’t have any tangible assets for many years, and, at best, that is intellectual property and real estate.”

Critics also say that President Barack Obama’s plans to raise income taxes on those in the highest tax brackets will hurt owners of small, high-growth businesses who file as individuals. “Rather than fiddling with various government programs,” says Raymond Keating, chief economist at the Small Business and Entrepreneurship Council, a lobbying group in Oakton, Va., “the Obama administration would accomplish much more in terms of boosting confidence and getting the economy moving by, at the very least, moving away from imposing higher personal income, capital gains, dividend and estate taxes on investors and business owners.”

Under the terms of the plan, by the end of this month, the government will start buying some securities backed by the most common type of SBA loans, known as 7(a) loans, in an effort to help banks move the assets and generate funds for new lending.

The government is eliminating fees associated with the loans and also giving them greater government backing. The plan raises the government guarantee on 7(a) loans to as much as 90%. Currently, guarantees max out at 85% for smaller loans and 75% for larger loans.

In addition, the government plans to buy mortgage securities associated with the SBA’s 504 program, which provides financing for land and buildings.

Treasury Secretary Timothy Geithner says the Treasury will take unprecedented steps to monitor the lending activity at banks, to make sure they’re lending to smaller businesses. The 21 largest banks receiving government funds will be required to report monthly their volume of small-business lending. Every bank nationwide will be asked to report total lending to small business on a quarterly basis. Currently, most banks disseminate that information annually.

“We need every bank in the country to do everything in their power to provide the credit that small businesses need to operate, expand and add jobs,” Mr. Geithner said.

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