Small Biz to Washington: About Those Promises…

BusinessWeek reader Lou Hoffman urges President Obama to make good on his campaign promises and give small business owners some credit

By Lou Hoffman

BusinessWeek reader Lou Hoffman is based in San Jose. Hoffman is president and CEO of The Hoffman Agency, a technology-focused public relations firm with offices across the U.S., Asia Pacific, and Europe.

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President Obama campaigned on an I-Will-Help-Main Street platform during his run for office. During his recent speech to Congress, the same theme came across loud and clear: "I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business."

Now, we finally see the rhetoric transformed into action. The Obama Administration's plan to invest $15 billion with the objective of helping small businesses doesn't come a day too soon.

Maybe it's timing, but since President Obama took office it's only become tougher—no, make that damn tougher—for small businesses to secure credit. The numbers bear this out. Only 28% of small businesses are using bank loans, the lowest rate since 1993, according to a policy brief from Seedco Financial.

Yet, to borrow from Shakespeare, here's the rub on that $15 billion package. These dollars earmarked for small business will have negligible impact unless we address a more fundamental issue.

This Administration needs to get everyone—Treasury, the regulators, and the banks—on the same page with a policy that genuinely frees up credit for small biz. The amount of lending that banks view as prudent business vs. the amount targeted by Treasury must be aligned.

Defining Acceptable Credit Risk

If we learned anything from the Troubled Asset Relief Program (TARP) last year—never a good sign when an acronym rhymes with carp—it's that pumping large sums of money into the banks by itself is not the answer to the credit crunch.

As I commented on a recent BusinessWeek.com article, "Can Obama Jolt Small Business Lending?" from the president of the National Bankers Assn.:

"If you have a pristine balance sheet the banks will line up in a tidy row to help you. But what about the other 95% of small businesses that have been rocked by the downturn, regrouped, and now are on a positive path? This is the issue that hasn't been addressed by the Obama Administration; i.e., getting the banks to evaluate the creditworthiness of a small business without being scared of their own shadow."

Of course, I understand banks must scrutinize the risk of any venture that extends the proverbial tin cup. If someone wants to take on the burger chains with yet another beef-between-bun venture I can appreciate taking a pass on funding. If a small business needs money to plant a flag in Eastern Europe with the aspiration to expand international distribution—again, such an action probably registers too high on the risk bar in today's climate.

But what about the small businesses that have been operating for five, 10, even 20 or more years—then got slammed by the downturn and now need capital to weather what remains of the storm? These are the same businesses that the White House acknowledges have generated roughly 70% of all new jobs annually in the U.S. over the last decade.

Don't Bank on Getting a Break

I suspect my own recent experiences with bankers mimic those of my small biz brethren around the country. You provide your financial information; the bank plugs the numbers into the system, and the system spits out the verdict that the risk is too high.

The flaw comes back to a system that puts inordinate emphasis on a small company's recent financial performance in determining risk. With virtually every small business in America experiencing a decrease in revenue over the past months, virtually every small business grades out as "not creditworthy."

This makes no sense—especially since the typical small business has already taken actions to reduce its costs and regain the black on the balance sheet.

Which brings us back to the $15 billion question: What is the Obama Administration doing to align the banks with Treasury and ensure that these small biz dollars flow, much less flow to the right places?

Entrepreneurship Could Suffocate

I recognize our greatest financial minds have been deployed on resuscitating the overall American economy, with the $787 billion new New Deal serving as Exhibit A. I assume they know what they're doing. Correction: I hope they know what they're doing.

Math (much less macroeconomics) was never my strongest suit, so I'm hardly the right person to debate the merits of the master stimulus plan. But if Washington can't get the banks to redefine what constitutes creditworthiness for small business and truly reestablish the lending pipeline, the impact goes beyond more job loss. We stand to suffocate the very entrepreneurship that can lead us out of this economic morass.

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