Ahead of a difficult election season, incumbent President Barack Obama laid out a new plan that would seek to tackle the biggest concern in small business circles: financing.
The President announced three different policy proposals designed to reinvigorate a slumping small business sector:
1. Increasing SBA Loan Size
The President hopes to pass new legislation to make the Small Business Administration a more powerful lender in the corporate lending space. Obama’s goal is centered on the 7(a) lending program, which currently has a maximum loan size of $2 million. Under the plan recently announced, the new loan size would be pushed to $5 million for purchases of capital improvements including machinery, land, buildings, and other equipment necessary to run a business. The real estate portion of the SBA lending program would also get a lift to $5.5 million. Meanwhile, microloans – the fastest growing segment in SBA and non-SBA business lending – would be increased in size from $35,000 to $50,000 on the high end.
2. Inject Low Cost Capital
The Small Business Administration’s goals cannot be accomplished without access to available and inexpensive capital. The President hopes to inject billions into a lending program that would flow through the Financial Stability Plan and into the hands of local lenders. In particular, his proposal supports lending in rural areas, where job creation has been slow and a long manufacturing decline has left behind persistently high unemployment.
3. Give Business Owners a Voice
The President also outlined a plan in which the US Treasury in cooperation with the Small Business Administration would speak directly to business owners about their fundraising concerns. The idea is more closely aligned with intelligence gathering than lending – the SBA hopes to learn what it could do to improve its lending process and make capital readily available for business owners.
The political environment appears ripe for a stronger role for the Small Business Administration in a slowly developing economic recovery. By increasing the loan sizes for the SBA’s most popular loans, President Obama believes that businesses will be more productive, and more businesses will be able to fit within the umbrella of an SBA loan.
Typically, loans backed by the Small Business Administration are easier to qualify for. The Small Business Administration accepts much of the risk in any enterprise, acting as an insurance policy for banks which might not otherwise lend to small business owners. The program is seen as a universal positive – it generates additional tax revenues for government when businesses successfully use loans for growth, and it generates business for banks that they might not otherwise have. The biggest winners, however, are the entrepreneurs who might not otherwise find it possible to capitalize their business without a small business loan.
Scaling the SBA lending maximums higher would also allow borrowers who have already used the program to tap additional capital. Traditionally, a business proves itself first with a SBA loan before using a commercial banker. However, in a weaker credit environment, commercial banking activity has declined substantially, bringing more entrepreneurs back to the government to “double dip.”