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Why a Small Business Stimulus Makes Sense

Too big to fail? What about too small to fail? We take a look at why a small business stimulus program makes sense.

The government is contemplating taking money from the $700 billion rescue program for the banks and making the money available to millions of small business owners.

Why a Small Business Stimulus Makes Sense

Initially, this money was intended to prop up the ailing financial system.

It was assumed that a massive injection of money into the financial system would unlock the floodgates of credit access for businesses.

Back in late 2008, in a USAToday article on the credit crunch, I was quoted as saying the following:

If money starts flowing again and businesses no longer have to worry about access to credit, you'll see things start to mend," says Gaebler. "If the banks hoard the cash they are getting access to, then it's going to require an escalation in intervention."

Well, the banks of course started hoarding cash the second they got it from the Treasury. Very little of that money was made available to business owners.

As a result of a continued business credit crunch, what happened?

In essence, to our mind, there are four important anti-entrepreneurial ramifications to tight credit:

  • Struggling small and mid-sized businesses cut employees. This exacerbated a growing unemployment problem. In fact, many small businesses have simply closed up shop, which has led to even more unemployed individuals. Close GM down and the job losses are next to nothing, compared to what happens if you close down the small business economy.
  • Entrepreneurial succession stalled out. With baby boomer business owners ready to exit their businesses and millions of unemployed individuals ready to buy those businesses, you would think we'd have had smooth transitions of business ownership. However, buyers could not get loans to buy businesses, so the business-for-sale market is basically frozen right now. Many owners are simply closing down, rather than waiting for it to become a seller's market.
  • Lines of credit were lowered or cancelled. The evaporation of credit lines has been putting intense pressure on many small businesses that were otherwise thriving.
  • Startup capital is not available. Outside of friends and family, where can a startup entrepreneur get funding? Nowhere. Home equity lines of credit are done, due to depressed real estate values. Borrowing from retirement funds is no longer an option, given depressed nestegg values. The banks are not lending, and the SBA has put caps on goodwill lending over a certain amount.

Long story short, at a time when small businesses need access to credit more than ever before, at a time when the wheels of entrepreneurial succession need to be greased more than ever before, when startup entrepreneurs and existing business owners need support more than ever before, the stewards of the small business economy have been sleeping on the job.

Finally, the Obama administration is acknowledging that giving money to the banks was not a cure-all and that they need to make working capital loans more readily available to business owners who will then be able to keep employees, buy inventory, pay off high-interest debt and otherwise invest in their businesses.

The best way to do this, and the way that will likely emerge as the frontrunner for a small business bailout, will be to expand the SBA's 7(a) lending program.

Critics, however, wonder whether government monies should be invested in small businesses. After all, don't half of small businesses fail within the first five years? Isn't it much better to invest in a company like General Motors that has been around forever?

These critics underestimate the importance of the small business economy. Unless they are suppliers to General Motors or otherwise directly attached to that company, most small business owners could care less whether GM goes under. Outside of Detroit, business owners and their employees care about only one thing: Is my business secure? Is my job secure?

Thus, allocating federal loans to small businesses is the best way to spread hope rapidly. It will prevent the huge layoffs that result when thousands of small businesses shut their doors. Moreover, because small businesses spend money quickly, as do their employees, this is the best way to get money moving rapidly through the economy.

The trick, of course, will be giving loans to winners and not to losers.

Any business that has no right to survive should not be saved by this bailout. But, any business that has a chance to survive should not be left to die when they could be saved by a well-structured stimulus program.

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Conversation Board

Do you agree that a small business stimulus program makes sense? What do you view as the main benefits of a small business bailout? What do you think the risks are?

  • Danny M posted on 7/13/2009
    Danny M
    I could not agree more. Why bail out overpaid execs at big companies that do not execute well when you could instead give relief to real people running real businesses? My worry is this is too little, too late.

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