Capital Access to Small Business is Crucial to Future Job Growth
The recent job creation numbers illustrate the anemic growth in our nation's economy. While Massachusetts is faring better than most states, there are glaring weaknesses in the Commonwealth's economy beyond the Greater Boston area and the Route 128 corridor.
Most economic policy experts believe that the key economic driver of new jobs is small business. I think it's instructive to review the initiatives enacted by federal and state governmental policy makers since the recession, to cope with this economic contraction. It may be beneficial to offer specific options that might better influence small business investment behavior and capital formation.
In 2009, Congress enacted a $787 billion economic stimulus package that included approximately $733 million for the Small Business Administration (SBA) to reduce all fees for the 7A and 504 programs and to raise the SBA guaranty from 75% to 90% on bank originated loans to small businesses. The financial meltdown coupled with an actual contraction in the Gross Domestic Product made it untenable for banks to lend to non-performing enterprises under any conditions for 12-18 months. While the economic stimulus temporarily mitigated the precipitous financial decline for the state and municipal governments, it didn't place sufficient emphases or resources (i.e. less than one tenth of 1%) toward incentivizing small businesses to grow new jobs. In fact, the allocation of money to the SBA lasted less than twelve months.
In the late fall of 2010, Congress passed a Small Business Credit Initiative, which reactivated (for three months) the 90% loan guaranty for banks and eliminated the fees for the 7A and 504 programs. Demand spiked regionally during the fourth quarter of 2010 from lenders and small businesses who were utilizing the higher SBA guaranty amount. However, when the subsidies of fees ended in January of 2011 and the loan guaranty to banks was reduced from 90% to 75%, demand slackened considerably. There was $1.5 billion allocated to states, on a formula bases, to provide capital access and credit support for quasi-public or private corporations to lend to small businesses. Massachusetts will receive $22 million through the Secretary of Housing and Economic Development.
The controversial feature of this bill was a $30 billion Small Business Credit Initiative, which would be loaned to banks with less than $10 billion in assets that need additional liquidity to make small business loans. This program, however, is envisioned to be administered by the Department of Treasury. New England banks have accumulated a tremendous amount of liquidity and are not terribly interested in borrowing "TARP type" loans from the Treasury to re-lend to small enterprises. Several New England Senators, including Brown (R) of Massachusetts and Snowe (R) of Maine, cast strong objections over this component of the legislation. In retrospect, I believe they were correct in their assessment as far as New England lenders are concerned.
This same money could better be deployed in two distinct ways that would lengthen the SBA's subsidies and redirect capital to small businesses through the SBA. Here are a few suggestions on how Congress could stimulate the small business sector by re-allocating a sizable portion of the $30 billion that is targeted for banks.
First, renew the 90% loan guaranty percentage offered to banks from the SBA from September 1, 2011, through December 31, 2012, to provide a longer runway for capital formation between banks and small businesses. The 3% - 3½% fee for the popular 7A program would also be eliminated during this time-frame. Approximately $10 billion would be reserved for this purpose, which would absorb a tremendous amount of lending demand over a more sustainable period (i.e. 16 months).
Second, reallocate at least $10 billion of the Small Business Credit Initiative funds from the Treasury and have the SBA lend the money on a subordinated basis directly to small businesses. While there may be inherent resistance to altering the current SBA mode of doing business, the nation's pressing economic needs should transcend that reluctance. SBA currently has a single underwriting location in northern California that does diligence on the 7A loan guaranty program. SBA certainly can staff up to handle a new underwriting protocol for eighteen months. The current level of federal appropriation that capitalizes the SBA is anemic. SBA already underwrites federal disaster loans direct to small businesses under a Presidential declaration. Therefore, this shouldn't be an insurmountable obstacle for the Small Business Administration, particularly with experienced professionals in the 50 District offices, and given the current dire need to reinvigorate our nations' economy.
Governor Patrick and the State Legislature consolidated two small quasi-public finance corporations into the Massachusetts Growth Capital Corporation, which will be the single point of entry for technical and financial assistance to small business. The Governor and the state legislature also recapitalized Massachusetts Growth Capital Corporation with $15 million from another quasi-public agency's balance sheet, as well as approved a $20 million bond issue for this purpose. While the Massachusetts Growth Capital Corporation will begin to make a dent in accommodating small businesses that need liquidity for growth, requests for their $1 million limit will ultimately diminish their lending resources.
In discussions with the Senate President's office, it has been suggested that the Commonwealth's pension fund make available a portion of its portfolio for small businesses. State Treasurer Steve Grossman, who was a CEO of a family-owned small business in Somerville, should be amenable to that idea because he was a private sector entrepreneur for many years. The Treasurer could invest, on a pilot basis, $50 million in the Massachusetts Growth Capital Corporation and have that money re-loaned to growing high technology, life sciences, information technology and software firms that possess strong cash flow but no hard asset collateral. New jobs could be tracked on a separate basis with this specific investment and the return on these funds can meet the Treasurer's objective of 8.25%. A loan loss reserve could be established by Massachusetts Growth Capital Corporation with the remaining interest income it receives from the loan repayments. As a Board member of Massachusetts Growth Capital Corporation, I am beginning to see requests for up to $1 million from companies who are poised for tremendous growth over the next several years. Again, this approach at credit intervention would be in collaboration with the banking sector, which is highly regulated and cannot always make cash flow loans even to their better customers. This is a modest amount from the State Pension system but represents a departure from their historical investment strategy.
In summary, if the country is counting on small business to be the engine of new job growth, both federal and state policy makers must be able to back up their rhetoric with money. The federal government needs to target its discretionary dollars in a more concerted effort towards agencies like the SBA in order to achieve meaningful results. This will require not only a reallocation of resources, but a change in the federal government's systemic approach on fostering capital formation for small business job growth. These proposed federal and state capital initiatives are designed to stimulate small business job growth. The current status quo has not accomplished the overarching objective of influencing small business to hire new employees at a pace which will effectively reduce a stubborn unemployment rate. Therefore, we must consider other viable options to tackle this national challenge.
Hopefully, these ideas will not only stimulate a debate, but produce tangible progress on workable options that can be implemented at the federal and state levels.