Wall Street Rescue: What about Small Business?

Sept 24, 2008

As the Administration’s proposed $700 billion financial bailout plan for some of the largest U.S. corporations dominates the headlines, there are countless small-business owners struggling with tightened credit, skyrocketing energy costs, and an inability to afford quality health insurance. In February, NSBA asked small-business owners if their business had been impacted by the credit crunch, and 55 percent responded that it had. In August, that number jumped to 67 percent.

Small businesses are hurting. In August, NSBA members reported only a two percent net new job growth rate. The lower level of confidence in the economy, the more likely small-business owners are to buckle-down and not implement new growth strategies. Given the significant role small business plays in job creation—responsible for 93.5 percent of net new jobs since 1989—this extremely limited rate of net new job growth is concerning, and something the U.S. can ill afford to ignore.

In the past year, small-business owners consistently have ranked economic uncertainty, rising energy costs, and the cost of health care among their top three concerns. While Congress and the Administration attempt to hammer-out a compromise on a $700 billion corporate bailout, it is important—not only to America’s small-business community, but to the overall U.S. economy—that small business issues not be pushed aside.

Economic Uncertainty
Even in a growing economy, many small businesses lack the assets necessary for a traditional bank loan, making them a riskier option for banks. With the number small businesses using bank loans at a 15-year low, the recent shake-up in the financial markets could make financing an even bigger challenge. According to the Federal Reserve Bank’s July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, 65 percent of domestic banks—up notably from 50 percent in April—had tightened their lending standards on loans to small firms. Small firm demand for loans has also significantly decreased in the past three months. Approximately 15 percent of large domestic banks, on net, experienced weaker demand from small firms, however 5 percent of these banks, on balance, reported increased demand from large and middle-market firms.

Credit Card Reform
The House recently approved 312-112 the Credit Cardholders’ Bill of Rights Act (H.R. 5244) sponsored by Rep. Carolyn Maloney of New York, that would stop credit-card companies from continuing to exercise harmful and anti-free-market practices that severely inhibit small-business owners’ ability to grow.

Credit cards are critical to small businesses. Many small businesses lack the assets necessary for traditional bank loans and turn to credit cards as a vital source of capital. In a nationwide NSBA survey, 44 percent of small-business owners identified credit cards as a source of financing they had used in the previous 12 months—more than any other source of financing, including business earnings. Despite small-business owners’ increasing reliance on credit cards—in 1993, only 16 percent relied on credit cards—nearly two-thirds reported in August that the terms of their credit cards are worsening.

NSBA is urging the Senate to include companion legislation to H.R. 5244 in any economic stimulus or rescue package—a very tangible way to ease small-business pain from the credit crunch with insignificant CBO-estimated budget implications.

Access to Capital
To address this tightened lending and decreased demand for loans, it is critical that the U.S. Small Business Administration’s flagship 7(a) loan guarantee program operate at full capacity. The 7(a) program provides incentives in the form of a financial guarantee to banks for making loans to small businesses. In FY 2005, funding was completely stripped from the program making it reliant solely on borrower and lender fee. These fees have doubled and are currently at their statutory limit, causing 368 banks to quit the program in the last two years alone.

The issue with fully funding the 7(a) program is not a new one. During the last decade, the funding for this program has been reduced from FY 1995 level of nearly $200 million down to less than $80 million in FY 2004. Considering the program’s role in stimulating job-growth—for every $33,000 lent through the 7(a) program, one job is created or retained—surely this miniscule federal outlay is justified.

Independent Community Banks
Small community banks fear becoming an inadvertent casualty of the government conservatorship of Fannie Mae and Freddie Mac. The takeover eliminated dividends for common and preferred stock in these government-sponsored enterprises’ (GSEs) and devalued the preferred stock by placing it in a junior position. Many community banks purchased GSE preferred stock under recommendation from regulatory examiners and outside accounting firms. Now community banks are finding their capital significantly depleted, constraining their ability to lend money to small businesses in their communities.

NSBA joins the Independent Community Bankers of America (ICBA) in calling for Congress not to simply dismiss billions of dollars of GSE equity held by these small-business banks who provide needed capital to their communities’ small businesses.

Energy Costs
Small business, along with the rest of the country, is being pummeled by the rising cost of energy. Eighty-seven percent of small-business owners in August stated that rising energy costs have had a negative impact on their business—up 10 points from the Feb. 2008 survey.

NSBA has been an ardent supporter of energy efficiency as a way small businesses can save money. Unfortunately, less than two percent of ENERGY STAR’s $50 million annual budget is spent reaching out to help small businesses. A meager $2 million budget would greatly improve the ability of the ENERGY STAR Small Business program to assist small businesses struggling to afford energy and fuel.

Cost of Health Care
Currently, corporations can deduct the cost of premiums as a business expense and forego all payroll taxes on these expenses. Unfortunately, the self-employed are prohibited from taking that deduction, resulting in an additional 15.3 percent tax on their health insurance premiums. Legislation has been introduced repeatedly in both the Senate and House (currently H.R. 3660/ S. 2239) yet has never been voted on. With an estimated average cost of $2.5 billion per-year, this legislation would help make health care more affordable for more than 21 million self-employed individuals in the U.S.

NSBA is urging Congress to send the message to America’s small businesses that Wall Street isn’t the only street in America that matters. If Congress passed each of these fiscally modest, but economically significant bills, the estimated cost in FY 2009 would be $2.582 billion. Surely America’s small businesses—which create more than half of all private nonfarm GDP—are worth that.