When big banks and insurance companies were being handed billions of dollars in bailout funding, many owners of small businesses grumbled, “Where's our bailout?” They got their answer yesterday, when the Obama administration announced a package of measures aimed at increasing the flow of capital to small firms.
A statement outlining the terms of the package explains that “economic recovery will be driven in large part by America's small businesses, which have generated 70% of net new jobs annually during the past decade.” As a result of the recession, though, the flow of credit to small business has dried up. For instance, loans guaranteed by the Small Business Administration (SBA) will amount to just $10 billion this year, half of what they have been in recent years.
The measures announced yesterday aim to ease the effects of this credit squeeze. One critical component is $15 billion that has been set aside for the purchase of securities linked to small business loans. This should help jump-start the secondary market for loans guaranteed by the SBA. In addition, the 21 largest banks that have received federal bailout funds will now be required to report their small business loans each month. Moreover, the Internal Revenue Service will allow companies with revenues up to $15 million to “carry back” their losses for up to five years. This means they can effectively get rebates on taxes paid in past years.
According to a report in The New York Times , President Obama emphasized the importance of these measures in a meeting with small business owners at the White House. “Today, too many entrepreneurs can't access the capital to start, operate or grow their business,” he said. “Too many dreams are being deferred or denied by a form letter canceling a line of credit.”
Wharton professors have often criticized government bailouts because they tend to condone inefficiency. For example, many of them opposed the handouts that airlines asked for following the September 11 attacks in 2001. In the present instance, though, the small business stimulus is not just justified – it has been long overdue. And once small firms regain access to capital, their next step is clear: Start generating those jobs.