Small Consolation

Despite the lip service paid to the importance of small businesses, efforts to ease their credit woes have come up short.

Small banks are inherently at a disadvantage to larger lenders, says Paul Merski, senior vice president and chief economist for the Independent Community Bankers of America, since they generally have to get pre-approved by the SBA, a process that can take months thanks to backlogs. “The [federal] programs are set up to work; it’s really just an execution issue [at the SBA],” he says. Reining in “overzealous” bank regulators and continuing to bolster the secondary market for SBA loans (one component of last February’s stimulus bill) will also help entice more lenders, Eastern Bank CEO Richard Menzies told a House committee in October.

Calling on Angels

If current government actions aren’t working, what would? The NFIB, for one, advocates a business-payroll tax holiday, broad-based tax breaks, tax holidays for consumers, or all three. Bloom suggests having the SBA become a direct lender for a limited span of time, say, 12 to 18 months. (The agency already does this for individuals and businesses affected by national disasters.) Pennington and others say more stimulus money and more pressure from banking regulators is what’s needed. “Dedicating only one half of one percent of the total stimulus package toward small businesses, which have created two-thirds of the nation’s jobs in the past 15 years, is just ridiculous,” she says of the $5 billion total set aside so far.

In the interim, many small-business owners are tapping resources outside the banking sector, namely, private investors. The landscape there is only slightly less bleak. Angel investors, usually the first source of outside equity for small businesses, shelled out 27% fewer dollars in the first half of 2009 compared with the same period in 2008, according to the Center for Venture Research at the University of New Hampshire. The one bright spot? The number of deals increased 6%.

Venture capitalists were even more tightfisted. In the first three quarters of 2009, 463 firms received their first infusions of venture capital, down 50% from 2008, and the dollar volume of such deals dropped 58%, year over year, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association. The third quarter, in particular, showed the lowest dollar volume for such financings in the nearly 15-year history of the survey.

Perhaps the best hope for companies eager to tap federal resources is to take another route: become a government contractor. Federal agencies are required to give a certain percentage of work (the SBA’s recently declared goal is 23%) to small and minority-owned businesses, says small-business counselor Manninen. He is crafting such a plan with Doherty, who quips, “That’s my government bailout.”

Alix Stuart is a senior writer at CFO.

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