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How the Government Can Lend Directly to Small Businesses

Marc Tracy bizbox.slate.com

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April 4, 2009

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An interesting comment popped up on a post we made late last week concerning the continuing--actually, both continuing and accelerating - decline in Small Business Administration - backed loans. We suggested that these declines may mean that the SBA, which generally backs loans made by banks to small businesses without originating the loans themselves, may in fact need to be given the power to make direct loans to small businesses. The comment argued that the SBA may have that power already.

The comment was written by one Colin Tooze, who identifies himself as being affiliated with the American Society of Travel Agents -- actually, he appears to be its Vice President of Government Affairs. In arguing for the SBA to initiate a direct-lending program (perhaps along the lines proposed by Sen. Chuck Schumer?), Tooze points to a previous instance in which the SBA actually made direct, low-interest loans to small businesses in need: immediately after the attacks of Sept. 11, 2001, when the agency extended credit to many small businesses whose welfares were affected by those events--among others, "literally hundreds of small business travel agencies," who struggled massively as customers couldn't rush fast enough (you remember, right?) to cancel existing trips and stop planning for future ones.

According to Tooze, these post-9/11 loans were made as so-called Economic Injury Disaster Loans. Under this program, the SBA can directly extend loans to eligible small businesses (as well as small farmers/agricultural cooperatives and certain non-profits). The loans cannot exceed $2 million or 30-year terms, and are extremely favorable: their interest rates may not exceed 4%

In November, Tooze's group, the ASTA, contacted both outgoing SBA Head Sandy Baruah as well as Barack Obama's transition team requesting direct lending to small businesses under the same model.

The ASTA, by the way, seems perfectly situated to make this case. By their own account, they have in the past been beneficiaries of direct SBA lending. At least in our personal experience, travel agencies tend to be small businesses, and so we suspect that most of the group's members are owners or employees of small companies. Finally, travel agents are likely to hold one among those occupations most threatened by the likes of the recession we are currently facing: they are a (in some cases) non-essential feature of a non-essential activity (vacations), and thus are likely to be hit extremely hard when most people are searching for ways to cut back on expenses.

Think of things this way. The current economic climate--brought on as it was by forces well, well outside the control of any travel agent, or travel agents' group, or most other sorts of entrepreneurs--is simply something of a disaster.

Then check out the SBA's own information on its Economic Injury Loan program. A small business is eligible for these loans if, among other conditions, it has "suffered substantial economic injury, regardless of physical damage, and is located in a declared disaster area."

Now look around. Unemployment is skyrocketing. Credit seems more scarce than gold (whose price, by the way--an historical indicator of investor pessimism--is currently near its all-time highpoint). Bankruptcies big and small are everywhere you look. This whole economy is a disaster area.

Under this established SBA program, eligible borrowers must demonstrate that they cannot secure credit via its "normal lending channels". Given the state of the credit markets--and, for that matter, of SBA 7(a) loans--that shouldn't be difficult. They also may ask only for money that they would otherwise have were it not for the relevant "disaster". Given the size of the current economic earthquake, that shouldn't be hard, either.

So not only is there precedent for direct SBA lending to small businesses (recent precedent, to boot); and not only is that precedent very much analogous to contemporary times. In addition, that precedent can be cited by the Obama administration to start up again without Congressional approval. The program's already in place. All that's left is the willingness to act.

Mr. President-elect (soon-to-be Mr. President), whaddya say? With the stroke of a pen, you could free up government cash to go not just to the biggest of banks, but also to the smallest of retailers. And, yes, perhaps to a few travel agencies as well.

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