Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners.  The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.

Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages.  Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary.    As general policy goes, I hate the idea of the government subsidizing anything.  However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be.    After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.

Elimination of All Capital Gains Taxes on Small Business Investment. Wow!  This sounds great!  Except for one thing.  When someone invests in a small business, they typically invest for the long-term.  While this policy would mean well, will it really create a flood of investment into the small business market?  After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road.  Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.

Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along.  Altering the tax rate in the short-term does little to spur on long-term investment.  The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made.  If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business?    If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold.  Investors like certainty.  Little certainty equals little investment.  Greater certainty equals greater investment.

I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.  I applaud the President for this proposal.  I just happen to like it for slightly different reasons than he does.

Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth.   Interestingly, many in the banking industry say that the extra funds will not help lending.  They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.

If a business participates in the loan program, does it subject that business to more regulation and government control?  If so, the loan may not be worth it.

Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks.    An easy example of this are the underwriting guidelines for these loans.

The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed.  (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?)  The ARC Loan program was a complete failure by any measure.  It was amazing to me how many SBA Lenders had never even heard of it.   A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them.  They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.

While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue.  Small business owners rarely make decisions based solely on tax results.  Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.

In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “  Well, that sounds spectacular, Mr. President.  I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010.  Or, are you just paying us lip service again?  Only time will tell.  In the meantime, kudos to the President for at least proposing some small business relief.

ARC Loans?  Remember those?  (See my prior post from June 16th:  ARC Loans Are Ready To Go – If You Can Find a Lender.)    While the Simulus Act did very little to help small businesses, it did have a provision  allowed for these ARC (America’s Recovery Capital) Loans through the Small Business Administration.  These were to be quick and easy loans for viable small businesses that have hit tough times due to the recession.  In theory, the loans would get them through the tough times.  Plus they were interest free for the borrowers (the government paid the interest).

The Small Business Administration is reporting few ARC Loans approved in the Charlotte, NC market.

If this provision of the act would have been properly executed, it would have been one of the few provisions in the act that had more benefit than cost associated with it.  Unfortunately, there just are not that many loans being made – especially in the Carolinas (where I am).

As of August 24, 2009, there have only been 16 ARC loans approved in all of North Carolina since the program was launched in June.  The numbers are worse in South Carolina where only 10 ARC loans have been approved.  (For a listing by State visit this link.  I am not sure how often they update the list.)  This is despite overwhelming demand from the small business community.

Some states have experienced a higher rate than we have locally, with Minnesota leading the way with 236.  I still contend that this is a tiny number compared to how many small businesses are demanding these loans, and how many of them need these loans.  I also wonder how many of them are not even aware that these loans exist.

Several reasons exist for this epic failure within the Stimulus Bill.

First, it isn’t worth the work for the banks.  There is a lot of red tape and paperwork on the banks end to participate in the program.  Sure, the payment of the loan is guaranteed, but will it cost more to place the loan than the bank will make off of the interest during its term.  The Charlotte Business Journal quoted Lee Cornelison, the NC district director for the SBA, as saying, “Normally, they [the banks] go through all this paperwork for a $1 million loan.  Now they’re being asked to do the same amount of work for a $35,000 loan.  That’s part of the problem.”

Another reason for the failure goes back to the risk/reward analysis for the bank.  While the loans are guaranteed by the government many of the banks are complaining about the small amount of interest that they get on these loans – prime plus two percent.   The bank still must spend time and money servicing these accounts and in the event that the borrower doesn’t pay – they must spend valuable resources trying to collect.  The guarantee doesn’t happen once a borrower misses a payment.  It will not happen until the borrower fully defaults on the loan.  Because of the cost associated with collections, many banks are shying away from the program.  The Office of Management & Budget projects that 56% of ARC loans will default.

A third reason for the failure of this program goes back to the red tape.  Even if a loan is being paid on time, banks are required to submit a monthly report to the federal government regarding how much was disbursed on the loan and what the bank is owed.  Since the banks do not have a process in place for this, it would require investing time and capital into setting up a special process.  Considering the low payoff for the bank and the fact that it is a short term program (ending in Septemeber 2010), it is unlikely that most big banks want to try to jump this hurdle.

Let me know your thoughts on this.  Do you know of anyone that has gotten one of these loans?  We have helped a few clients go through the process of applying, but have yet to have any approved (or declined for that matter).

The Small Business Administration (SBA) announced yesterday that small businesses can now begin submitting applications for its temporary new program called America’s Recovery Capital, or “ARC” for short. These loans are designed to provide a bridge to small businesses that have an immediate financial hardship – and can be for amounts up to $35,000.

The SBA defines a financial hardships as any of the following:

• Loss/reduction of customer base
• Increase in cost of doing business
• Loss/reduction of working capital and/or loss/reduction of short term credit  facilities
• Inability to restructure existing debts due to credit restrictions
• Loss/reduction of employees (intellectual capital)
• Loss/reduction of major suppliers (major suppliers out of business)

Other quick facts are as follows:

• ARC loans are deferred payment loans are 100% guaranteed by the SBA;
• There are no SBA fees associated with ARC loans;
• ARC loans are only available to established, viable, for-profit small businesses;
• ARC loans are disbursed over a period of up to six months;
• Proceeds from ARC loans can be used for payments of principal and interest for existing, qualifying small business debt including, mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payables to vendors, suppliers and utilities;
• The SBA will pay the interest on the ARC loans to the lenders at the variable rate of Prime plus two percent; 
• ARC Loans are interest free to the borrower [This beats the heck out of the 25.9% some of you are paying to Bank of America on your revolving lines];
• Repayment will not begin until 12 months after the final disbursement
• After the 12-month deferral period, borrowers will pay back the loan over a period of five years. 

It will be interesting to see how all of this ultimately goes down.  Based on the details that I have read, there seems to be little risk on the part of the lender; however, many of them have been hesitent to get on board with the program.  A CNNMoney article last week revealed that most SBA lenders hesitant to jump into the program.    While the rate to the lender is variable, it isn’t as high as some of the other SBA loan programs.  This could be a turnoff to some banks, but as an SBA spokesperson pointed out in the CNNMoney article, there is virtually no risk to the lender since the SBA is providing a 100% guarantee. 

Please let me know of your experiences with ARC loans – whether it be finding a lender who is doing these or any pro’s and con’s you have seen through the process.  I know a lot of businesses that will be applying for these in the next few weeks – providing that they can find lenders.

For more information on ARC Loans, visit the ARC Loan portion of the SBA’s Website.