The aid package recently signed into law that included $12 billion in tax relief for small business and a $30 billion lending fund to be administered by the Treasury Department contains many provisions to create a climate that allows businesses to be successful. As a business owner and manager, I am wholeheartedly in favor of that.
The tax incentives to invest in equipment will provide the stage from which our small business can modernize and grow to more effectively compete in the global marketplace. This, coupled with the capital gains elimination of qualified small-business investment, will likely focus capital in a manner that truly helps small-business owners with very real liquidity concerns.
On the bank or lender side of the equation, the provisions are set to provide an inexpensive source of funds for bankers to lend, and it is a great start to make lending attractive again. However, I believe there are three true hurdles to be considered if this side of the ledger is to be effective.
First, banks have become increasingly aware and cautious of taking handouts from the federal government. They have learned that not only is the fine print very important to read but that even after signing on the dotted line, the rules are subject to change.
Providing a pool of funds is attractive but if lenders in any way believe changes might occur, the full cost of funds cannot be calculated and utilization may be limited.
The second issue rests with the assumption that community banks are the primary small-business lenders in the country. Over the past 20 years, many large banks and financial institutions have invested great sums of time and resources to create fast and efficient lending processes to deliver credit to smaller borrowers. The products offered are typically mainstream types of credit (e.g. working-capital lines, equipment purchase, term debt for growth, etc.) that can be standardized and processed very quickly.
This has left community banks to grab the scraps off the table in the form of more difficult types of loans or those requiring more direct involvement, which is why many community banks are saddled with a disproportionate share of commercial real estate debt.
Lowering the cost of funds for community banks as this law does will be an attractive lending catalyst only if the total COF, including processing and losses, remains competitive with the larger institutions.
The last of the three key ingredients is the general economy, which is driven by the consumer, who is driven by confidence. Unless demand picks up, or can be accurately forecast, why would a small business buy more capacity now?
Most businesses are running well below capacity, so unless a desire to further reduce costs through modernization exists, what is the reason to significantly invest in new equipment?
Lenders provide funds to organizations that have a very high likelihood of repayment and only fractions of a percent to a few percentage points of loss expected. Small business must have demonstrable demand and sufficient collateral before banks will lend even if they have the funds.
As a case in point, many of the top lenders are sitting on sizable deposits that are invested in low-yield securities waiting on better lending opportunities. They are doing this simply because fewer borrowers meet good lending criteria in the current economic environment.
While the steps taken by our government in this law are noble, more must be done. Specifically, those in a position to influence economic behavior should provide concrete assurances regarding the rules of engagement.
They should promote a level playing field from which financial institutions of all sizes can compete effectively.
They also should craft policies that instill confidence and provide resources to the consumer, who will ultimately stimulate demand for goods and services.
Once policymakers and regulators embrace a complete view of the problem and begin taking steps to correct all aspects of it, then, and only then, will we experience meaningful, lasting results.