The following is a “sneak preview” of an upcoming Forbes article written by Chris Hurn about the continued mixed messages from our Government about truly supporting the “Small Businesses” in America, enjoy…
As we catapult through the newest political season, I’m reminded of a theme from the last presidential election when the stump speeches often touched on the concept of the government “picking winners and losers.” Whether we are discussing the auto business struggling or the banking industry teetering, a fundamental question arises, asking whether or not the government should influence policy in a way where it essentially plays favorites with some industries. Should our elected officials decide which businesses are “too big to fail?” Sadly, in the world of small business lending, we are seeing just such a situation as Congress continues to play favorites. And once again banks are getting the benefit, but this time the losers are small business owners. Let me explain further…
A few weeks ago, the favorite small business lending program of the federal government, the SBA’s 7(a) program, was temporarily shut down. The program is the darling of small business lending as it offers the best deal for banks which participate in it. During relative good times such as we are experiencing now, lenders flock to the 7(a), and it frequently exceeds Congress’ lending limits. Just such a thing occurred recently, causing the aforementioned shut down.
But fear not. As the favored child of SBA lending, the 7(a) program was quickly rescued and the lending ceiling was raised by Congress and approved by President Obama in a matter of days.
At the same time, a lesser-known legislative effort to assist a lesser-known SBA loan program sits idle in Congress. Back in May, before the 7(a) shutdown was on anyone’s radar, Rep. Judy Chu reintroduced the Commercial Real Estate and Economic Development Act (CREED Act). The bill will help small businesses expand their access to capital by extending the Small Business Administration’s 504 Loan Refinancing Program for five years.
Chu’s statement on the matter was perfectly on point:
“Small businesses account for two out of every three new jobs created. Which means that the best way to cement the gains of the still fragile economic recovery is to put more capital in the hands of those job creators. And that is exactly what this bill will do. While small businesses continue to face challenges with unreasonable real estate loans, this bill allows businesses to take advantage of low interest rates by refinancing existing loans and locking in long-term, fixed-rate financing so that they can create jobs and boost economic growth. All at zero cost to the taxpayers!”
The SBA 504 program offers one of the best options for small business owners who want to buy their commercial buildings and stop paying rent. The interest rates are traditionally lower than what is offered at a commercial bank, down payment requirements are smaller (typically half), rates are fixed and the loans are usually paid back over slightly longer terms. This program enables business owners to save money, reinvest in their businesses, hire more employees and grow their wealth.
In 2011 and 2012, more than 2,300 small businesses refinanced $5.5 billion of debt using this program, and some saved as much as $20,000 a month.
If Congress reauthorizes the 504 refinancing provision for fiscal year 2016, then many entrepreneurs can restructure loans and unlock the equity in their business to get better rates on long-term debt. They can then use this savings to create jobs and grow.
I’m not the only one pushing for this bill. Rep. Chu has a number of co-sponsors and a companion bill was introduced in the Senate. Several of the top community banking associations supported earlier versions of the CREED Act, and those with a direct stake in the program are, of course, on board. But, the bill still remains stuck in the legislative process despite its many merits.
One can only guess why enacting the refinancing provision for 504 loans can’t get traction. Every lawmaker supports Main Street, though this collective group of businesses doesn’t have effective and cohesive lobbying efforts. This is a situation where our lawmakers ought to be making the right decision on Main Street’s behalf, but something is holding them back. My theory: the banking lobby is against it.
Bankers make more money from SBA 7(a) loans and its robust secondary market than they typically earn on 504 loans, when the borrowers’ loan proceeds are for commercial real estate (where both programs overlap). In most instances involving owner-occupied commercial real estate, the 504 program is far superior for the borrower, yet banks continue to push the inferior, mostly adjustable rate 7(a) loans on their borrowers. Why does this happen? Banks are in business to make money, and they are well represented in Washington with one of the most powerful lobbying sectors in the country. Bankers make more money from the 7(a) program on floating-rate commercial real estate loans so their lobbyists influence Congress and the president to play favorites.
As a zero subsidy program, SBA 504 loans cost the U.S. government virtually nothing. A simple change in public policy could save many small businesses hundreds of thousands of dollars – and pump billions into our economy. While I’ve suggested in the past that this overlap in programs be altered – let 7(a) loans do what they do best: business acquisitions, partner buyouts, working capital financing, startup capital financing, etc. – that step isn’t necessary at this very moment. Rather, simply bring back the 504 refinance program and let the marketplace decide.
Barring a sudden change, however, it appears that Washington has already picked the bankers as the winners. And in this case, all small businesses lose.