$30 Billion Small Business Fund In The Works
In his 2010 State of the Union speech, President Obama said he wanted to help small businesses get credit by creating the Small Business Lending Fund. Under this fund, banks would in theory take taxpayer cash and leverage it with their own money to create greater lending to small businesses. The bill also includes business tax breaks and improvements to Small Business Administration loan programs.
The House already has passed its version of the bill. The legislation creating this fund recently cleared key Senate hurdles and appeared headed for passage until negotiations on certain amendments broke down, causing Republicans to block a vote on the bill, at least for now. Still, passage is ultimately expected to occur.
The mechanism of the fund is the ability of the US Treasury to purchase up to $30 billion in preferred stock or debt instruments in community banks (those with total assets of less than $10 billion). In return, the Treasury would receive preferred stock dividends (or interest) at a rate that is determined by how aggressively the banks loan the money. In other words, the more aggressive they are in lending, the less they will have to pay to Treasury.
The rate would begin at 5%, but could be as low as 1%, depending on how much the bank increases its lending to small businesses. For this purpose, a small business is defined as one which is independently owned and operated and that is not dominant in its field of operation.
As with much of the financial legislation these days, there has been considerable disagreement on the wisdom of this approach.
Supporters of the bill say that by leveraging the money, banks could take the $30 billion and make up to $300 billion in loans available to small businesses.
Senate Finance Committee Chairman Max Baucus (D-Mont.) said recently, "Small businesses are the engine of American job creation and they need our help and they need it now". "This bill supports job creation by giving small businesses and entrepreneurs the access to capital, resources and opportunities they need to grow and create jobs. We have a responsibility to pass this and pass it quickly."
Further, supporters argue that it would be at no cost to the taxpayer because the money would be repaid and with a return on the investment.
Other commentators aren't so sure. Capital Insight Partners' Managing Director Eliot Stark has stated publicly his concern "whether this 'no risk' funding will fuel loans to businesses that aren't creditworthy enough to meet banks' normal underwriting standards. And, if approved, who will be the banks willing to make riskier loans?", adding that it could lead to a smaller scale version of the Fannie Mae/Freddie Mac fiasco.
Even blunter, Stephen Spruiell of the National Review has termed it, "Son of TARP", writing that "allowing Treasury to buy into politically favored businesses would mean the permanent TARPing of the American economy."
One commonality between the fund and TARP is that there appear to be no restrictions on how banks use the funds. So, presumably, a bank could use the funds to cover other losses, make acquisitions or other non-lending purposes.
The proposal, of course, gives banks an incentive to use the funds to increase lending by reducing the cost of the funds through a rate reduction, as discussed earlier. If the bank uses the funds for other reasons and lending remains the same or decreases, the rate could actually go up to as high as 9%.
When asked for a local perspective on the bill, Jeff Lynch, President and CEO of Heber Springs State Bank had this to say, "House Bill 5297 is not a program that would benefit HSSB or its customers. For the past 90 years, Heber Springs State Bank has been meeting the needs of its customers in a safe conservative manner, and today is rated one of the nation's strongest financial institutions. We have an excellent capital ratio and are very capable of meeting our customer's loan needs without this special governmental program."
Passed or not, small business concerns will still primarily be surviving the recession, growing their business, the possibility of increased taxes and greater regulation, and higher energy, labor and other costs. If the economy is to stabilize and add the jobs that are so badly needed, small business must not only survive but thrive.
It remains to be seen if this legislation will be a factor in that, and if so, will it be positive or negative.
