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Small Businesses Need More Incentives in Bailout Bill

By Keith Girard
October 2, 2008

Small businesses traditionally have been the odd man out in the high-powered world of Washington politics, which has long dominated by deep-pocketed corporations. But in the past month, Main Street has been invoked more times than you can count to justify passage of the $700 billion bank bailout bill, but the measure clearly falls short of helping small business.

There’s no question that the credit crisis is real and that its origins are firmly rooted in Wall Street. But according to my own informal survey, while most major small business groups have endorsed the legislation, some groups say the rescue bill needs to do more to stimulate the economy -- not just the credit markets. On that score, it falls short on key provisions that will help small businesses play their traditional role as a catalyst for economic recovery.

As I noted in my column "Wall Street Crisis Rings Hollow on Main Street," last week, the National Federation of Independent Business’s monthly survey of small business economic conditions found that only 3 percent of those surveyed considered credit their No. 1 concern. The biggest fears were rising prices followed by the cost of health insurance. The bill’s supporters say if the credit crisis hasn’t swept Main Street yet, it soon will. But one thing is certain; the situation has ratcheted up uncertainty and that is having a strong psychological affect on owners.

"The fact remains that this necessity has been a difficult pill for small business to swallow," said NFIB president and chief executive Todd Stottlemyer, on the eve of Wednesday’s Senate vote on the bill. "However, small business owners recognize that their ability to grow their business depends upon stability and liquidity in the financial markets," he added.

It must also be a bitter pill for the NFIB as well. It has always opposed regulation and government intervention in the marketplace. But Stottlemyer noted that the Senate bill contained some important new provisions that should make it more palatable for small businesses. Some of the provisions are the so-called "tax extenders" that I wrote about in my column "SMBs in Dead Heat on the Tax Merry-Go-Round" last month.

In particular, the NFIB singled out a measure to help local community banks clear worthless government-sponsored assets from their balance sheets. These assets are related to the government bailout of Fannie Mae and Freddie Mac, the two giant, government-chartered mortgage organizations. The takeover wiped out holders of Fannie and Freddie common and preferred stock.

Fannie and Freddie shares were once considered as good as gold, and many small banks bought them because they were considered safe, dividend-paying stock. Under the bill they will be able to treat the loss as ordinary losses instead of capital losses, which could free up to $450 billion in capital for other purposes.

As Stottlemyer noted, community banks are critically important to small businesses. In fact, 48 percent of the small businesses that borrow from banks do business with institutions that have less than $1 billion in assets. But another 44 percent of small businesses are forced to rely on credit cards for financing.

The National Small Business Association (NSBA) notes the number of small businesses borrowing from banks is at a 15-year low because banks have increasingly shifted firms to credit cards. The House of Representatives recently passed The Credit Cardholders’ Bill of Rights Act (H.R. 5244) by a strong margin, 312-112, and the group is urging lawmakers to include its credit card reforms in the rescue bill.

The bill addresses some of the more egregious abuses, such as universal default, double-cycle billing and retroactive interest rate hikes on existing balances. More than 80 Republicans supported the bill despite strong opposition from the Bush administration. The NSBA is urging its members to write lawmakers and urge them to include the reforms in the bailout bill.

The Senate strongly endorsed the $700 billion economic bailout plan on Wednesday, after lawmakers laded the bill with a number of popular additions to make it more palatable to the House, where it failed in dramatic fashion on Monday. The bill, which was three pages in length when initially drafted, now spans more than 450 pages, and American Small Business League President Lloyd Chapman is raising red flags about one administration-backed provision.

Buried in the bailout bill is a provision that will give the Bush Administration officials broad power to waive any provision of the Federal Acquisition Regulation (FAR) they choose for an indefinite period of time, says Chapman.  The regulation governs federal acquisitions and competitive bidding procedures, including the requirement to set aside a certain percentage of government contracts for small businesses.

"Treasury Secretary Paulson should not be trusted to waive provisions of the FAR, which could be beneficial to his past and future employers on Wall Street and detrimental to the primary goal of the bailout bill, which is to bolster the national economy," says Chapman. "More fraud, abuse and loopholes for Wall Street and government officials will not make our nation's financial institutions more sound, create more jobs or help middle class Americans pay their bills."

Senate small business committee chairman John Kerry, D-Mass., has also been critical of the measure. "If we can spend $700 billion to fix Wall Street, we should be able to help our everyday entrepreneurs who employ half of America’s workforce and pump almost a trillion dollars into the economy each year," he said in a recent statement. "These owners are suffering today because of a credit crisis that is preventing them from gaining access to the capital they need to keep running - let alone to expand their firms to compete globally."

Traditionally, the Small Business Administration’s (SBA) 7(a) and 504 loan programs have provided 40 percent of the country’s long-term capital to small businesses, filling a gap left by private lenders, he notes. But these programs have become too expensive for many small business owners. Loans to small businesses through the 7(a) program are down 30 percent and loans through 504 have dropped 16 percent this year, costing the economy more than 42,000 jobs.

Kerry is pushing legislation to temporarily ban fees charged to borrowers and lenders who participate in the 7(a) program. The bill also suspends the lender and servicing fees and increases the maximum loan size for the 504 program. The relief package also would allow a limited amount of refinancing on certain mortgages, make the program’s job creation requirement more reasonable and improve and standardize the owner-occupancy requirement.

The proposals, he notes, are similar to those enacted to bolster the economy after the Sept. l1, 2001 terrorist attack. The changes helped then -- pumping more than $2 billion into local economies and saving or creating about 77,000 jobs -- and they’ll certainly help today, says Kerry.

"My changes will fill the gap left by the private sector at a time when our nation’s owners and employees on Main Street are wondering why the CEOs who created this crisis are receiving a bailout when they’re struggling just to keep their doors open," Kerry added.

Small businesses are widely recognized for creating the jobs that traditionally have lifted the economy out of downturns. If lawmakers are truly interested in helping Main Street as well as Wall Street, they need to broaden the bailout package to provide incentives like the ones suggested by Kerry to stimulate the economy -- not just credit markets.

Source:  www.allbusiness.com



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