I flew into New York City early yesterday afternoon and met with Marshall Eckblad, the national banking reporter for Dow Jones (owners of the Wall Street Journal, Barron's, SmartMoney, and others). And after getting his personal tour of the Dow Jones offices (including seeing the wall of Pulitzer Prizes and “The Hub,” where reporters from all over the world work on stories side-by-side . . . couldn't quite get him to show me Rupert's [Murdoch] offices), we spent nearly two hours discussing all things small business and small business finance-related. While speaking with him, I got to thinking about the recent flurry of proposals targeted at saving America's small businesses that have finally been tossed around by the Obama Administration in the past ten days or so. Being the advocate for owners of small and mid-sized businesses that I am, here's a summary of what our President has proposed, as well as my reactions to them . . .
For JOBS - - Enact $33 billion worth of tax incentives to spur hiring and wage growth. This proposal includes a $5,000 per-worker tax credit for new hires in 2010, and a potential reimbursement of Social Security taxes businesses pay on 2010 payroll increases. All companies would be eligible for these tax credits, but they would be capped at $500,000 so as to steer the bulk of these benefits toward small and mid-sized businesses.
MY REACTION
- - - I believe these incentives will make hiring easier for firms that had
already
- planned to bring on new employees. But the sad fact remains that plenty of small and mid-sized businesses need lots of help to stop the bleeding before they ever even start thinking about adding personnel. Not to mention, $5,000 in tax credits is still relatively minor and NOT enough to stimulate an employer into hiring an employee unless and until that employer has work (which is created by demand for the employer's products/services) to be done (if you haven't read my previous posts about this, start
- ,
- and
- ). Additionally, I'm all for payroll tax reimbursements, but a surer and faster delivery of these benefits to stimulate the economy would simply be a payroll tax holiday for employees and employers (this is also something I've already proposed numerous times:
- and
- are two examples). Also included are the raising of equipment expensing thresholds (which again, only helps businesses buying equipment this year . . . not the ones sticking with their five-year old copier for another year) and the proposed elimination of capital gains taxes on small business equity investments. I'm particularly excited about this last one, though the reality is that most in Washington don't understand how such a free-market initiative would stimulate investment in this vital sector of our economy. Of all of these proposed details (above and below), I give this one the least chance of seeing the light of day, despite it being one of the most effective proposed actions.
For COMMUNITY BANKS - - Use $30 billion of TARP receipts for a new government lending program to get Community Banks lending to small businesses. The idea here is that Community Banks will make more loans to small and mid-sized businesses from this new pool of money.
MY REACTION
- - - This isn't a terrible idea, but it's full of holes. My apologies to Phil Alden Robinson, the writer and director of
Field of Dreams
- , but this is a “lend-it-and-they-will-come” hoped-for result. Many Community Banks are in relatively decent shape (especially compared to their Big Bank Brethren), but most (the healthiest ones) are reluctant to take money from the government because of the stigma it carries. Other Community Banks, that aren't doing so well, are likely to do what the Big Banks did with the original TARP handouts: use it to shore up their balance sheets. In either case, I predict that not enough of this money will get into the hands of business owners as intended, and therefore will have minimal impact. Moreover, there's a reason only about 20% of the banks in the U.S. actually offer SBA loans: it's a very specialized type of lending . . . NOT the kind of thing an owner of a small business wants to be his banker's guinea pig for.
The last thing to consider here is that not all small businesses are seeking credit right now. What they need most is demand for their products and customers to sell to. I've also written about this here on this blog, so go here to read the rest of my thoughts on this matter.
For THE SBA - - Relax some of the SBA's lending limits and make these loans more widely available. President Obama has proposed raising the SBA Express loan caps from $350,000 to $1 million, the caps on 7(a) loans from $2 million to $5 million, and the caps on SBA 504 loans from $4 million to $5.5 million. He's also asked Congress to extend fee waivers for the 7(a) and 504 loan programs (which took effect with the Recovery Act last February). And most importantly, he's proposed that SBA 504 loans be used for refinancing commercial mortgages (something that hasn't been allowed previously).
MY REACTION
- - - I agree with the President's approach here. The SBA will be able to help a great deal if some of the limitations are lifted, which you can read more about
- .
The “biggie” to me, however, is the possibility of using SBA 504 funds for debt refinancing. This looks like it will be a temporary expansion, unfortunately, and will only apply to businesses with commercial loans maturing in the next year (and that are current on all their debt payments). I would really like to see this become a permanent change, as smart business owners will be able to unlock the “embedded equity” in their commercial property and equipment, and then redeploy that capital to grow their businesses. By not allowing this “tweak” sooner, Washington left nearly $3.7 billion “on the table” and “unspent” in the last fiscal year alone . . . at a time when that kind of cash would have made a more significant impact than $255 million in ARC loans.
I also think Congress and the Administration need to relax their paternalistic approach toward America's small business owners . . . most of the above proposals have plenty of strings attached (too numerous to document here today) that only demonstrate a distrust of business owners to do the right thing. The political class could start by allowing these SBA 504 refinances to occur regardless of whether a borrower's mortgage is maturing in the coming year. This proposed tweak needs to go a little further - - let all reasonably healthy small business owners tap their embedded equity NOW, while they lock in today's near-historic low interest rates. THAT would be the kind of hand-up many small business owners would truly appreciate. It's time Washington starts listening to those in the trenches, before they propose more steps leading nowhere . . .
By the way, I'm writing this blog post was written in my hotel room overlooking Central Park and Columbus Circle while my wife (here with me on an early Valentine's Day present) watches that vampire movie, Twilight, in the background. It's a good thing I wanted to explain these public policy proposals to you, as that movie is like watching my toenails grow . . . it's painfully, tear-inducingly boring! After a few minutes of watching it, I'm ready for Edward or Jacob to end my misery . . . maybe they can start in our Capitol.
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