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Saving the Economy

One of the toughest domestic tasks to face the Obama Administration during its first 100 days involved getting the U.S. economy back on track.  The federal stimulus package has a number of prime elements to it, each one a broad overview designed to repair what many people consider to be damaged fiscal policy.  These factors include:

• Create New Jobs
• Move toward a greener (more environmentally responsible) economy
• Improve the country’s infrastructure
• Improve all levels of education
• Offer greater assistance to the unemployed
• Provide tax relief for 95 percent of Americans
   

Frozen Assets

Major corporations, notably those in the financial and automotive sectors, have received billions of dollars of taxpayer money in the form of loans and outright gifts.  The credit crunch that resulted from the collapse of a number of banks has had a devastating effect on the ability of American small business to conduct, well, business.  These companies rely on short- and medium-term financing to do everything from providing payroll relief to offering bridge loans for ongoing operations to funding new construction or remodeling.  Because so many banks are loaded down with “toxic assets”—loans that are unlikely to ever get paid back—they have no way to free up capital to provide new loans to the companies that need them.

Proposing a Small-Business “Bailout”

One of the roles the Small Business Administration (SBA) plays is to subsidize and even guarantee loans to small businesses.  The bill recently signed by Obama injected $730 million into the federal agency, which is above and beyond their annual operating budget of $570 million.  Additional assistance for small businesses—aside from the extra money available to lend—will take the form of tax cuts, grant programs, and even public works projects with small-business set-asides, where bidding is restricted to companies with annual revenue of $5 million or less.  A total of $15 billion in cash is earmarked specifically for the secondary credit market.  This is where individual SBA loans are bundled together and sold to brokers, who in turn group even more together and offer them to investors.  Because of the sub-prime mortgage debacle, secondary markets for any type of SBA loan had essentially disappeared.  Under the terms of the bill, the U.S Treasury itself will act as the primary buyer of secondary loan instruments.

Where’s My Cash?

Small business is vital to the success of America’s economy, mostly because it accounts for as much as 70 percent of newly created jobs.  To further explain his concern, Obama was quoted as saying, “Less lending leads to fewer jobs and lower spending, which leads to less lending—a vicious cycle that delays our recovery.”  Any SBA loans made after July 1, 2008, are eligible to be resold under this program.  For community banks, which write the majority of SBA loans and consequently have been hit the hardest, this is definitely good news.  After all, banks can’t earn a profit if they have no money to lend.

Additional Provisions and Benefits

Besides the infusion of cash for the SBA, the federal government has relaxed some regulations and eased restrictions that will also help out small-business owners.  For example, a number of fees normally charged to borrowers will be reduced or eliminated.  The IRS has agreed to allow small businesses to obtain refunds on taxes paid as far back as 2003 to offset losses taken in 2008.  Businesses can usually go back no more than 24 months to apply for this credit.

If you own a small business, now is the time to check with your local lending institution.  It will be easy to judge whether or not this program is working as designed.  All you need to do is ask, “How soon after I apply for a loan will I see the money, and how much will you lend me under what sort of terms?”

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