Here’s how to insulate loans from the political process

October 30, 2011

In light of the Solyndra failure, what should the government do to better ensure it is investing in small businesses that are viable? For starters, it can protect small business funding from the political process and it could allow small business owners around the country — rather than federal officials in Washington — to review the loan applications of peers in their areas.

Nobody can guarantee the viability of any small business, and so there can never be a total certainty that investments made will be repaid. This is the nature of risk in the marketplace. It is unavoidable.

The government must recognize that some of its investments will fail. This risk can be minimized by insulating new small business funding from federal bureaucracies and politicians. The ‘investment loss’ is some small degree of loan loss that might occur. The ‘investment gain’ is growing payrolls in all sectors where small business can make a difference. The gains come from wherever small business has potential to grow, and not in areas where politicians want to plant their flags, such as clean energy.

Small business operators are a pragmatic bunch. To them the world is apolitical. They migrate toward opportunity. This creates jobs. What they need is access to financing.

Capital markets are not perfect. The federal government can encourage small businesses by backing loans. Small companies can sometimes self-finance, but if they see opportunity for rapid scale increase, this is virtually impossible to accomplish without loans. The scale of needs is beyond the personal capabilities of nearly all entrepreneurs. Angel sources, venture capital funds and commercial banks are the traditional sources but they cannot be counted on consistently in time of need.

Here’s what the government should to do help the small business engine create jobs:

Loans need to be completely insulated from the political process. No politician ought to be able to influence or contaminate it.

The federal government could establish districts, perhaps similar to the Fed districts. A set amount of new funds would be allocated to each district on annual basis. Funds would be awarded by a committee/board of private business representatives, appointed for membership based on their business acumen, restricted to businesses of medium to small stature. These appointments could be made by district. Small businesses would submit proposals to the district board. The board would meet periodically to review and rate applicants, and awards would be made quarterly or semi-annually.

Helping commercial banks feel more secure about loans to small business is more important than having loans made directly by the federal government. In this proposed federal program, districts would award loans at heavily subsidized rates, and assume the risk of failure. This would put the government in the position of providing what small businesses really need — access to capital, not ‘investment’ per se.

Loans would by and large be paid back, yet some would certainly end in bankruptcy. Having savvy small business owners run district boards would minimize risk and assure far lower levels of default than if administered by some federal bureaucracy.

Small business owners are pretty good about sniffing out bad deals and poor management. Let this be a peer-judged process.

Robert Hill has founded several small businesses in North Oaks, Minn., including Ayrstone Productivity, an Internet connectivity company for small businesses and rural homesteads; and Caledonia Solutions, a research and consulting company that serves manufacturers with market assessments.

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