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?