Yesterday, we looked at the tax incentives in the competing stimulus bills on Capitol Hill, and already that post is (mildly) out of date: a bipartisan, but Republican-dominated, coalition of Senators rose up to strike down a giveaway to the still-profitable movie industry. (Later last night, a bipartisan coalition led by Democrats beat back another big giveaway, this time a bipartisan amendment that would have allowed corporations to repatriate income earned overseas and pay a tax rate of just 5.25 percent.)
Today we turn our attention to financing. Both houses of Congress aim to encourage more small business lending, through the Small Business Administration. They go about it differently, however. The Senate would simply reduce the cost of borrowing by $615 million. (This is long an ambition of both Democrat John Kerry, the former chair of the Senate Small Business Committee, and Olympia Snowe, the committee's ranking Republican.) The House, by contrast, prefers to establish a raft of new programs and sub-programs that will create whole new bureaucracies to disperse $426 million.
General business loans: The Senate would foster borrowing in the SBA's flagship 7(a) program by waiving $515 million in borrower and lender fees. It would also increase the maximum loan size eligible for the standard 75 percent guaranty to $3 million.
Meanwhile, the House would make SBA lending more appetizing to banks by offering a modified 7(a) loan with a guaranty up 95 percent. Secondly, because the secondary market for pooled 7(a) loans, which many banks rely on to make new loans, is largely frozen, the House would create a new "Secondary Market Lending Authority" within the SBA. This office would make loans of unlimited size to industry brokers, who would use the proceeds to buy more 7(a) loans. Finally, the House would have the SBA refinance small business loans—SBA-backed loans and conventional loans alike—and make direct loans to small firm borrowers if commercial banks in the 7(a) program won't.
Fixed asset financing: The Senate would shore up the SBA's 504 loan program by increasing the maximum loan sizes—up to $5.5 million for manufacturers—as well as waiving $100 million in borrower and lender fees. The House would establish a new SBA guaranty for the portion of the 504 loan that's made by a commercial bank. (In a 504 loan, the bank partners with a non-profit community development company. The non-profit's portion of the loan is pooled with other 504 loans, which are converted into bonds sold on Wall Street with an SBA guaranty. The House version would create a similar guaranteed pool for the commercial 504 loans.) Both the House and Senate would create a new provision to permit 504 loans in cases where the project includes debt refinancing.
Small business investment: Both chambers would expand the SBA's Small Business Investment Company Program, where venture capital funds borrow money from the government to make debenture loans or take equity stakes in small firms. Both the House and Senate would increase the maximum amount of leverage available in most cases from $75 million to $150 million. The Senate would further raise the maximum for funds that invest in poor areas to $175 million, and require every fund seeking new leverage to direct more investment to "smaller" companies. Both chambers would also increase the maximum investment an SBIC can make in one of its portfolio companies: to 30 percent of the fund's private capital in the Senate version, and by a more complicated formula in the House plan.
Construction Surety Bonds: The Senate would provide $15 million in additional capital for the SBA's Surety Bond Guarantees Revolving Fund. Moreover, the Senate today is considering an amendment that would raise the maximum project size eligible for SBA protection from $2 million to $5 million, as well as apply the federal size standards for the program to state contracts funded by the stimulus bill. Presumably this would allow larger contractors to participate in those deals.
In principle, and at first glance, the Senate plan seems more reasonable. The Agenda shudders at the prospect of adding a slew of new missions to the SBA's portfolio; the agency is scarcely able to administer its present obligations, even when times are flush. But if the problem in small business finance is not demand for credit, but supply—that is, if banks are unwilling to lend—then it's hard to see how merely lowering fees will open up the capital tap. Bob Coleman, the SBA industry analyst behind the Coleman Report puts the Senate initiatives last on the scale of effectiveness. Program fees, he says, are "more of a nuisance issue for lenders. They have minimal impact in a lender's decision to grant credit." The most important initiatives, he says, shore up the secondary market. As of last night, however, there were no Senate proposals to revise this part of the bill.
On tax relief, this column sided with the Senate. But the House has it right on financing. To free up lending, the SBA is going to have to get bigger before it gets better.