by Nick Gromicko and Kate Tarasenko
As we mark the 80th anniversary of the Stock Market Crash of 1929, America’s current economic recovery is a political hot potato that few can agree on, whether discussing causes or solutions. Regardless of party affiliation or financial standing, home inspectors hoping to expand their businesses by obtaining commercial and small business loans from the Small Business Administration may be in a better position to do so, if the Obama administration’s proposal prevails in Congress.
The expanded measures of the Financial Stability Plan, unveiled on Oct. 22, and whose provisions are a nod to an identical bill introduced by SBA Committee member and Republican Sen. Olympia Snowe of Maine, proposes raising the SBA’s 504 loan caps from $2 million to $5 million, and raising lending limits on the Microloan Program from $35,000 to $50,000. The 504 Loan Program provides guarantees on loans for commercial real estate and other fixed assets to small businesses for expansion that will create new jobs and retain existing ones. The Microloan Program provides funds to start-ups and other small businesses. SBA loan caps haven’t been raised in nearly 10 years.
The U.S. Treasury Department’s Troubled Asset Relief Program (TARP), under both the previous and current White House, has been heavily criticized for handing over the lobby-rife, multi-billion-dollar banking industry what amounts to corporate welfare, while smaller banks have been languishing or shuttering altogether in record numbers not seen since the Great Depression, leading to a domino effect of business and home foreclosures, repossessions and bankruptcies.
The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, already temporarily raised the guarantee on SBA 7(a) loans, and eliminated up-front borrowing fees for both 7(a) and 504 loans. Additionally, the ARRA cut taxes for small businesses by allowing them to immediately deduct up to $250,000 of investment, carry back losses for five years, and exclude 75% of capital gains from small business investment from taxes.
The current proposal relies on making lower-cost capital available to banks, especially those that have already benefited under TARP, to be earmarked specifically for small business applicants, at an initial dividend rate of 3% under the Capital Purchase Program, down from the original 5%. This dividend will increase to 9% after five years to encourage timely repayment. What is especially important for the economic recovery of local communities and rural areas is that the Financial Stability Plan also expands available funding to community banks and credit unions that were previously left out in the cold under TARP. Banks with proven track records for supporting small businesses through loans stand to gain the greatest funding, and those wishing to get on the same track will need to submit plans outlining their small-business support, as well as quarterly accountability reports of their small-business lending, in order to be eligible for the reduced-rate capital. It’s hoped that these new incentives will lead to a financial course correction, since, historically, banks with assets of under $1 billion tend to make more than half of all their commercial loans to small businesses, while larger banks, whose assets total more than $1 billion, lend only 20% of their commercial loan funds to small businesses.
According to the proposal, in the next several weeks, Treasury will work with community banks, lending institutions and the small business community at large to finalize program parameters that will include the amount of capital available to participating banks, and the treatment of existing CPP participants that wish to replace existing capital with investments under the new program.
Of greatest concern to our many InterNACHI members is that the communities hardest hit by bank closures have also experienced the highest levels of job loss, abandoned construction projects, and business closures, which have made both smaller banks that are still in operation, and the larger, more traditional lending institutions skittish about lending to smaller businesses. To encourage lending to small businesses in these communities, Treasury is creating an initiative for certified Community Development Financial Institutions (CDFIs) that can prove that over 60% of their small business lending targets low-income communities and under-served populations, as they are required to do now in order to maintain CDFI certification and continued access to lending dollars. Institutions that wish to join the program but that have not yet been certified as CDFIs will have their eligibility review expedited by the CDFI Fund. Capital will be available to CDFIs at a rate of 2%.
While mainstream media continue to tell us that the recession is officially over, try telling that to struggling small businesses and budding entrepreneurs looking for an unlocked door to their dreams. Whatever the news reports, InterNACHI will be keeping an eye on this developing story.