Landrieu: Small Business to Benefit from Economic Plan

Sen. Mary Landrieu (D-La.), the head of the Senate Small Business and Entrepreneurship Committee, said today that the proposed economic recovery plan currently in debate on the Hill moves small business in the right direction.

Language in the bill temporarily eliminates fees associated with the Small Business Administration's main lending program. Landrieu said that action could stimulate as much as $20 billion in new small business loans, creating up to 600,000 jobs. The Federal Reserve's Senior Loan Officer Opinion survey released this week showed that 70 percent of domestic banks have tightened small business lending.

The Senate measure also includes small business incentives such as increased expensing amounts and the ability to include more losses on their business tax returns. Senate Democrats need support for the measure from their Republican peers. Sen. Olympia Snowe (R-Maine), a senior finance committee member and the top Republican on the small business committee, said today she's working with Senate and committee leadership to adjust the tax provisions in the stimulus legislation to garner enough support to pass a compromise in the Senate.

"The alarming January job loss statistics make it even clearer that we need immediate action to slow and reverse the nation's economic recession," Landrieu said. "If we are going to get out of this mess, small businesses will lead the way. It is imperative that we give these firms the resources they need - access to capital, counseling and contracting programs - so that they can succeed and create new jobs."

Landrieu recently held a roundtable on how the federal government can encourage small business growth and job creation.

By Sharon McLoone |  February 6, 2009; 3:35 PM ET Economy Watch , Policymakers
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It was very disappointing to NOT see in the press release from Sen. Snowe and Sen. Landrieu (February 3, 2009 Landrieu, Snowe Urge More Help for Entrepreneurs) not one mention of a Direct Lending Provision to the Stimulus Package. There is no way that reducing fee's, increasing guarantees, trying to clear the secondary market and/or providing tax credits will make lenders lend. The vast majority of the lenders are no longer providing SBA loans - they are either out of business, acquired or they have totally eliminated their staff. The current lenders are cherry picking from only the best applications and there is no competition for loans at all. The non bank lenders cannot portfolio loans until the secondary market clears and that will take many months. Big banks want to fix their balance sheets and small banks are not capable of handling the volume of lending that the market needs.
Right now, Small Business in America is in a boat that has a hole in the bottom and is on fire. Easing the pressures for lenders may well fix the engine on the boat, but what good will that be when the boat is a burnt shell on the bottom of the ocean.

Why isn't there any provision from the Senate for Direct Lending when
1. Candidates Obama/Biden called for a Direct Lending program in “A Nationwide Emergency Lending Facility for Small Businesses“ this fall before the election.
2. Sen. Kerry and Sen. Schumer wrote to then-Acting SBA Administrator Baruah calling for direct lending in the form of a “Bridge Loan” program mirroring the proposal of candidates Obama and Biden
3. No less an authority on Small Business in America, George Cloutier (a graduate of Harvard and Harvard Business School, and the founder and CEO of American Management Services), wrote (http://www.huffingtonpost.com/george-cloutier/is-president-obama-really_b_163126.html): The stimulus package should immediately allow $25 billion in direct loans to small business…
4. Dan Gerstein, former advisor to Sen. Leiberman, 01.14.09, on Forbes.com, proposed that “Only a direct lending program, would be capable of addressing today’s problem.(http://www.forbes.com/2009/01/13/small-business-loans-oped-cx_dg_0114gerstein.html)
While still an Economist at Harvard in August, Larry Summers stated that to be effective, the stimulus had to be timely, targeted and temporary. A direct lending program through the Small Business Administration would meet that definition. This would allow the other programs for SBA Lending to take effect and begin the rebuilding process for SBA Loans through the private sector.

If Direct Lending is not a part of the Stimulus Bill, it will be a monumental mistake that will have catastrophic effects.

Posted by: ngordon1 | February 6, 2009 4:40 PM

WELL SAID NGORDON1!!!

Hopefully people reading this blog will also read the comments (as they are not displayed on the blog post)

I work for a mid/super-regional bank and do workouts, ie figure out what to do with our non-performing, delinquent, or otherwise distressed loans. I had previously worked in originating and servicing small business and commercial real estate loans, but our regional president asked me to take this job for a few years, as the bank was ramping-up staff in the department in anticipation of more troubled small business and real estate loans.

The "main program" the blogger is referring to is the SBA Express, and SBA 7(a) program, which provide banks with a deficiency guaranty, between 50 and 75%, though usually closer to 50%, of the loan balance.

I'll run through a quick scenario:

1.) SB owner applies to bank for a loan for $500,000.
2.) Bank underwrites the loan based on HISTORICAL PERFORMANCE of the business (you can imagine what that would look like now)
3.) Bank decides that this is an "okay" loan, but an SBA guaranty can help strengthen it.
4.) Bank approves and closes loan with an SBA guaranty, SB owner gets his or her $500,000.00, and pays approx. 2% to the SBA and lender ($10,000)
5.) Small Business defaults on the loan (which can mean not paying your loan bill, but CAN ALSO mean have had "material and adverse change to their financial condition", or not pay their landlord, or a host of other events that trigger a default)
6.) Bank demands entire balance of loan (standard right/remedy of a bank in 99% of SB loan documents)
7.) Borrower cannot pay. Bank is able to liquidate entire business, and come after the individual running it (due to the unlmited guaranties required for SBA loans, and confession of judgement provision as a lender remedy).
8.) AFTER the bank liquidates everything at a glorified yardsale (and likely bankruptcy of the borrower and individual), the bank gets reimbursed for 50-75% of the amount that it has not recovered.

To your point, Ngordon, lowering the fee in Step 4 will do NOTHING to stimulate banks to lend money. If my employer's borrowers are to get help from this ineffective stimulus, it must come directly from Uncle Sam. That means dollars. Lent to businesses DIRECTLY from the government. Lowering the fee on obtaining an additional guarantor (the SBA) is not going to change banks' lending policies, and is certainly not going to deploy $$ into our nation's lifeblood: the small business.

Our esteemed president did not and does not have an agenda to infuse our true economy with capital. As you said, the stimulus is doing little more than taking us a giant leap closer to fascism, where the only contracts (and subsequent revenue stream for a small business) come from the government re-sodding the lawn of The Mall.

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Posted by: lusily | February 9, 2009 8:01 PM

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