A cynic may say this $30 billion fund to encourage small community banks to lend to small businesses is mid-term election politics. The Small Business and Credit Act of 2010 (H.R. 5297) passed both Congressional houses and is expected to soon be signed by President Obama. This bill, however, is a waste of tax-payer money and will have zero effect on stimulating our economy for the following three reasons:
1. Businesses Need Confidence
Washington is playing the dangerous game of vilifying large businesses and banks on one-hand, but saying small businesses and community banks are good. But business is business. Most small businesses start out thinking that they will one day be big businesses. When I start a small business, like I recently have with FindTheBest.com, my goal is to eventually become a big business. This belief that government can micro-manage the economy with complicated programs is misguided.
2. Good Businesses Borrow for Growth
If you have viable business, banks will offer their assistance -- that is the nature of the banking industry. If your business is stacked with risks, a loan will most likely be the wrong solution. Simple business 101 -- a growing company often needs loans for cash flow and these loans can be secured with receivables. Other reasons for borrowing money include funding inventory and assets, all of which can be used to collateralize the loan (i.e., something the bank can seize and re-sell if you don't pay back the loan). Banks make these types of loans because that is their business. If your company is growing, it will be a win-win situation; you don't need government assistance to encourage good investments.
3. Bad Businesses Borrow for Losses
When businesses live beyond their means (i.e., expenses exceed revenue), they can't print money or borrow from other countries like our government does. Banks will not fund loses because these are high risk loans -- the company is likely to fail -- and there's nothing to secure. A risky business should not be rewarded with a loan.
With this pending bill, Congress is encouraging banks to move up the "risk curve." In other words, helping banks make loans which, without the so-called stimulus program, they would never make because the loans don't make economic sense. A cynic might draw an analogy to the mortgage industry where Fannie and Freddie encouraged lending to unqualified borrowers to buy over-priced houses they couldn't afford.
What are your thoughts on the pending bill? Do you think it has the potential of jumpstarting the economy or do you think it will just encourage risky lending?
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I think policy should reflect the reality of 90% of small businesses and not risk obsessed self absorbed entrepreneurs. Here is my built to stay small business - http://www.start-cleaning-business.com
All business but nonprofits want make money it is the nature of the beast. As for lending many small business owners have gone to the new microloan market which is booming since there was a need not being met by credit unions, small banks, or the big 5 or 6 for short term business loans, or money needed to secure larger loans for expenses, debt, bridges, collateral, or big purchases.
I don't know a lot of small businesses that have full-time lawyers on staff or representatives in Washington. They also rarely are able to work around state or local laws, receive tax breaks or other subsidies when opening their doors.
I don't know if this program will help or not, but this article seems to be a gross oversimplification either way.
A smart business owner will do everything legally to profit and that is why just between the states they fight for these business owners. NV & Del, FL and SD spend tens of millions a year to actively seek unhappy over taxed business owners in IL, NJ, NYC, Conn. Mass, MN, PA, and CA to move to their state to save themselves money. They know if it works these small business can grow and create jobs, low unemployment, and new methods of income to pad the states balance sheets.
Here's an example: 2020b This group of entrepreneurs in San Francisco has solved 3 big problems: urban living, new schools and clean, renewable energy - enough to cut Green House Gas emissions in HALF within 10 years. All three are very valuable solution and therefore do not need government funding.
America should be thinking like they are - Innovate to renew and create jobs.
Catch their Intro video at http://www.2020b.com
It will make you feel good about America, again.