The owner of a local Florida pizza shop quite literally gave President Obama a lift this weekend. But has Obama done much to boost small businesses in return?
Certainly Democrats have tried to play up the White House’s efforts to help small businesses. Small business owners like Bill Butcher, who owns a Virginia brewing company, were featured prominently at last week’s Democratic convention, praising the administration for lifting barriers for the little guy. The Democratic platform similarly boosts that Obama has helped “refocus the financial sector on getting capital to entrepreneurs and small and mid-sized businesses.”
How does the evidence line up with Obama’s claims? Other than tax breaks and tax cuts—which I’ll address in a separate post—the administration’s biggest effort to help small businesses has been on the lending front. Since the beginning of the recession, loans to small businesses have dropped because banks have been more reluctant to lend. Obama has tried to come up with new ways to tackle the loan access problem, most prominently through the Small Business Lending Fund. But the fund hasn’t provided the major boost originally anticipated.
In 2011, the outstanding loans to small businesses—defined by the FDIC as having a balance of $1 million or less—reached its lowest volume in five years, according to FDIC figures cited by the Small Business Administration.
The trend continued in the first quarter of 2012, when loan balances for small businesses and farms declined by $10.8 billion—faster than for businesses overall.
This slump is partly because banks see small businesses and entrepreneurs as being riskier. “They are being told to be more careful about their balance sheets and the creditworthiness of the borrowers,” says Scott Shane, an economics professor at Case Western University. It’s also because small businesses have less collateral to back up their loans, as “many small business owners had relied on home equity loans to finance their small businesses during the real estate boom,” according to the Congressional Research Service.
Obama took steps to encourage banks to address this problem through the SBLF, which Congress passed as part of a 2010 bill. There were high hopes for the fund, which was authorized to give out as much as $30 billion in loans to banks for small businesses financing. But the program has since fallen short of expectations. After taking nine months to begin its first loans, “Treasury funded just 332 of the 935 applications, investing about $4 billion” of the funds, according to the Government Accountability Office. Overall, “the SBLF’s $4.0 billion in financing represents less than 0.6% of outstanding small business loans,” CRS explained in February.
The GAO faults the administration’s failure to communicate clearly about how to apply to the program as one factor holding it back. “Although Treasury had several outreach efforts to communicate with the public about SBLF, such efforts have not always been timely or clear to applicants and other stakeholders and could contribute to SBLF being poorly understood by the public and Congress,” its December 2011 report explains.
Others argue that the SBLF’s criteria is inconsistent with its stated mission of helping small businesses. The fund was mandated “to encourage lending to businesses with revenue of $50 million or less, while the vast majority of small businesses in the United States have revenue of $1 million or less,” says Ami Kessar, CEO of MultiFunding, a company that aims to help small businesses secure financing.
The Obama administration counters that the banks that are participating in the program are lending more to small businesses than average. By the end of April 2012, the program has successfully catalyzed $5.2 billion in small business loans, according to Treasury. And outside of the program, the administration says that it’s increased direct loans to small businesses by $30 billion in 2011—significantly higher than before the financial crisis—and reduced red tape.
But if the SBLF ends up being a success story, it will have been on a far smaller scale than either Obama or Congress had originally expected. What’s more, it’s become clear that even boatloads of financing won’t change the fact that demand for the loans themselves has also fallen off, as small businesses themselves are reluctant to expand in a stagnant economy: