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Politically Correct Lending
Guest post by DOUGLAS FRENCH
There seems to be only one kind of loan that bankers want to make—SBA loans. SBA stands for Small Business Administration, a federal agency that guarantees certain loans made by banks that operate within its guidelines.
Lawmakers portray SBA lending as a boost for small businesses. The program is actually a form of corporate welfare for some of America’s largest banks. While banks reap profits, taxpayers cover the losses.
SBA lending is especially lucrative because, with a government guarantee, there are plenty of buyers for these loans in the secondary market. Borrowers are paying interest rates of 6 percent or more and the government is standing behind the majority of the loan balance. Buyers will pay large premiums for that kind of risk-free yield.
As hard as it has been to pry funds from lenders since the financial crash, the SBA had record years in 2011 and 2012, writing over $30 billion in loans each year. Making a profit and collecting interest and principal are not included in the SBA’s goals. Instead, the agency’s three strategic initiatives for 2012 were as follows:
1. Growing businesses and creating jobs.
2. Building an SBA that meets the needs of today’s and tomorrow’s small businesses.
3. Serving as a voice for small businesses.
The agency’s flagship loan product is the 7(a) program that funds business loans. More than $15 billion in SBA 7(a) loans was disbursed in 2010. The two years following were brisk as well, nearly matching the boom years of ‘04 through ‘07. These loans were used, per SBA guidelines, “to establish a new business or to assist in the operation, acquisition, or expansion of an existing business.”
Why, in particular, was there a surge in 7(a) loans? The Congressional Research Service reports,
Congressional interest in the 7(a) program has increased in recent years because of concerns that small businesses might be prevented from accessing sufficient capital to enable them to assist in the economic recovery. Some, including President Obama, argue that the SBA should be provided additional resources to assist small businesses in acquiring capital necessary to start, continue, or expand operations with the expectation that in so doing small businesses will create jobs.
Somehow, people like those cited above have come to believe that small businesses are at a disadvantage in obtaining credit. It’s a “market failure,” if you will. So the Small Business Act of 1953 created the 7(a) loan guarantee wherein 85 percent of a loan’s principal up to $150,000 is guaranteed by the government; the guarantee drops to 75 percent for loans more than $150,000. During 2010 and 2011, the guarantee was bumped to 90 percent.
Reams of paperwork are required of loan applicants, and of course approval can sometimes take months. First the bank does its investigation, and then the SBA does it all over again, unless the banker is an SBA preferred lender—then the agency will guarantee whatever loans the preferred lender makes, providing they followed the guidelines. Despite all of this rigorous underwriting, the SBA program has cost taxpayers $1.3 billion since 2000, according to an investigation by the Dayton Daily News. The paper found that a number of borrowers defaulted on their first payment. “Operators of national franchises like Quiznos and Cold Stone Creamery collectively received millions of dollars in loans through the program despite extensive default histories by the franchises,” write Lynn Hulsey and Ken McCall.
One would think there is always a market for sandwiches and ice cream. It turns out nearly 2,600 loans were taken out to fund Quiznos locations from 1990 to 2012, almost half as many as for Subway sandwich shops. According to Hulsey and McCall, these franchises dominated the list of businesses using government guaranteed financing. The 4.8 percent default rate for Subways is considered high. Quiznos’ rate is 23.4 percent.
“Quiznos also led all franchises with $43.5 million in defaulted loan guarantees that SBA had to pay the lending banks. Cold Stone Creamery was second with $29.6 million, followed by Days Inn with $16.9 million and Ramada Inn with $14.3 million.” Evidently being a part of a household name franchise and benefiting from national advertising does not ensure success. It’s worth wondering just how careful the underwriting was on those loans.
Pat Newcomb, director of the Ohio Small Business Development Center at the Entrepreneur Center in Dayton, Ohio, told the Dayton Daily, “There were an awful lot of people who got small business loans during this period 2004 to 2007 that shouldn’t have gotten them.”
Default rates soared after the 2008 financial crash. Lenders in a free market might pull in their horns in the wake of such bad loan experiences. Lenders handing out 7(a) funds, however, had a banner year in 2012, after their guarantee rates were increased in 2010 and 2011.
SBA lending is based upon politics and quotas, not economics. For instance, Bloomberg Businessweek reports that the national leader in 7(a) loans, Wells Fargo, has set a goal of lending $5 billion to Asian-American business owners by the end of this year. “KeyBank also runs a minority and women’s business enterprise program to help boost those outfits.” The SBA’s website has dozens of minority lending, training, and grant programs listed. With Congress and the President behind small business lending and taxpayers footing the bill, government-backed lending has been full speed ahead while credit is tight otherwise. Why should the banks do anything else?
This all should remind readers of the mortgage business. Through entities like Fannie Mae, Freddie Mac, and the FHA, the government now controls more than 90 percent of the home mortgage market.
The small-business Coyote Blog explains,
The SBA has already pretty much killed small business cash flow lending. Basically, if you want a loan secured only by cash flow, the SBA is your only choice. Why would a bank make such a loan privately when they can make it and get an SBA guarantee paid for by the client? As a result, no bank even has a desk for non-SBA lending, and since SBA lending is hard, many don’t have an SBA desk any more.
The blogger for Coyote speculates that the SBA has killed innovation in the private lending market and writes, “loans with SBA backing have crowded out everything else out there, such that a small business really can’t find a lender who will make small business loans except with SBA backing. Bankers are people too, and they can get lazy. They have come to rely on these government programs.”
Commenters on the blog confirmed the writer’s view:
- “Banks simply don’t understand anything other than SBA guidelines.”
- “The amount of cluelessness seen was pretty breathtaking. Basically, bankers (in general) know just enough about SBA guidelines to be able to semi-randomly throw stuff against the wall and see what sticks. Actual business knowledge? I couldn’t find any.”
- “I have no doubt the SBA killed off development of new ideas on small business lending.”
The SBA and the banks have PR machines that highlight the successful businesses that started with SBA financing. Like all government programs, there are always a few very visible beneficiaries. What isn’t so apparent is that when loans are made for political considerations as opposed to financial ones, capital is wasted and we are all made poorer.
Douglas E. French is senior editor of the Laissez Faire Club and the author of Early Speculative Bubbles and Increases in the Supply of Money, written under the direction of Murray Rothbard at UNLV, and The Failure of Common Knowledge, which takes on many common economic fallacies.
Q&A: Small-Business Health Exchanges
WSJ – The Obama administration recently revealed plans to delay part of a program designed to make health insurance more affordable for small employers. If you’re a small-business owner, what does this mean for you?
For starters, the initiative is called Small Business Health Options Program, or SHOP. It’s an insurance marketplace, or “exchange,” for businesses with 100 or fewer full-time-equivalent employees. Each state will have one starting next year. Some states will run their own exchanges, while others will be run in part or entirely by the federal government.
The SHOP is a key part of the health-care law because it aims to help lower insurance premiums by spreading the costs and associated risks among a large pool of participants.
Average annual premiums for employer-sponsored health insurance in 2012 were $5,615 for single coverage and $15,745 for family coverage, according to the Kaiser Family Foundation. That’s up from $3,083 and $8,003, respectively, in 2002. More
Jobs Groups: Don’t Trade Sequester For Tax Hikes
Jobs Groups Call The Democrat Sequester Alternative A ‘Bad Idea,’ Say Raising Taxes ‘Would Move Us In The Wrong Direction’
Dem Proposal ‘Worse Than Even The Sequester,’ A ‘Bad Idea,’ Just ‘Political Rhetoric’
U.S. CHAMBER OF COMMERCE: “The U.S. Chamber of Commerce… strongly opposes the motion to proceed to S. 388, the ‘American Family Economic Protection Act.’ This legislation would fail to address the federal government’s spending problems and would, instead, replace spending cuts with tax increases.” (U.S. Chamber Of Commerce, Letter To U.S. Senators, 2/27/13)
· “…this legislation would be worse than even the sequester. It would not prioritize less spending; rather, it would impose new taxes on businesses in specific industries. … S. 388 employs political rhetoric rather than seeking to implement good policy.” (U.S. Chamber Of Commerce, Letter To U.S. Senators, 2/27/13)
NATIONAL ASSOCIATION OF MANUFACTURERS: “The National Association of Manufacturers (NAM)… strongly oppose the American Family Economic Protection Act (S. 388) that would temporarily replace the sequester with a combination of spending cuts and tax increases.” (National Association Of Manufacturers, Letter To U.S. Senators, 2/27/13)
· “…we oppose the tax increases in the bill, including a proposal that would impose a permanent minimum tax on small businesses and other taxpayers. This provision would make a bad system worse by adding a new tax to an already complex and anti-growth tax code, costing even more manufacturing jobs. … Manufacturers believe that replacing the sequester with tax increases is substituting one bad idea for another.” (National Association Of Manufacturers, Letter To U.S. Senators, 2/27/13)
NATIONAL FEDERATION OF INDEPENDENT BUSINESS: ‘fix our dangerous fiscal situation without … raising taxes on job creators’ “Small business owners want their government to address our spending and debt problems with the same focus and seriousness as the private sector. Unsustainable government growth crowds out the private sector and leads to negative economic consequences… Our nation’s small businesses are calling on Congress to fix our dangerous fiscal situation without damaging economic growth or raising taxes on job creators. If our long-term fiscal outlook is not addressed by lawmakers now, then future generations will continue to be faced with higher debt and interest payments, increased tax rates and fewer investment opportunities.” (National Federation Of Independent Business, Letter To Sen. Cornyn, 2/13/13)
BUSINESS ROUNDTABLE: ‘Hiking taxes … would move us in the wrong direction’ “‘Hiking taxes and foregoing improvements in our nation’s long-term competitiveness in favor of short term budget choices would move us in the wrong direction,’ said BRT President John Engler. ‘The 4th Quarter contraction of U.S. GDP and persistently high unemployment underscore the urgency for action. America needs a growth strategy, not additional tax increases that will further worsen our already uncompetitive tax system. One-off tax proposals targeting specific industries cannot substitute for comprehensive reform of the nation’s century-old tax system.” (Business Roundtable, Press Release, 2/5/13)
NATIONAL RETAIL FEDERATION: “NRF is concerned by the Administration’s proposal to fund short-term spending needs by eliminating certain corporate tax provisions. NRF supports the type of corporate tax reform many Democrat and Republican policymakers have been advocating, which would eliminate corporate tax benefits in exchange for substantially reducing tax rates for all businesses. …piecemeal efforts to eliminate corporate tax benefits outside the context of corporate tax reform would make it very difficult to achieve the type of changes required to provide much-needed growth in the U.S. economy.” (National Retail Federation, Press Release, 2/5/13)
VooDoo Pizzeria: Help Us Bring This Amazing Restaurant Concept to Life!
Help us bring an all new, scratch-made, locally grown, wood fired pizzeria to Orange County California.
Dj partners and long time friends Steve Foley and Mike Walz have a vision to bring their passion for entertaining and great scratch-made, locally grown food & drink to Orange County California. a community that would be greatly served by this amazing concept.
Voodoo Pizzeria will be unlike anything Orange County has ever experienced. Infusing the best elements of New Orleans French Quarter nightlife and Voodoo-centric ambiance with California’s gourmet wood fired pizza. Using locally grown ingredients, this restaurant, entertainment & full bar concept is sure to turn heads and delight customers of all ages while serving the community with a unique dining experience.
We need your help to accomplish this task.
As you know, starting a business in any environment (let alone the financial situation we currently find ourselves in) is not easy and costs a boatload of money… that’s where you come in. We’re asking that you help with a donation to generate the seed money we need to reach our goal and take this project to the next level.
We fully intend to be a part of the growing cooperative of small business owners, growers, and restaurants that not only serve each other… but seek to enrich and benefit our community by providing the very best food made with the very best ingredients!
Tax Hike Would Hurt Small Businesses
President Obama’s Tax Hike Would Leave Businesses ‘With Less Money To Hire New Workers Or Keep The Ones They Have’
GOV STUDY: Tax Hike ‘Would Hit About 940,000’
“Obama’s proposal would hit about 940,000 people who report business income on their individual or household returns, says the Joint Committee on Taxation, the official scorekeeper for Congress.” (“Obama Tax Plan No Small Deal To Small Businessmen,” AP, 12/10/12)
· GOVERNMENT STUDY: “The staff of the Joint Committee on Taxation estimates that in 2013 approximately 940,000 taxpayers with net positive business income … will have marginal rates of 36 or 39.6 percent under the President’s proposal…” (Joint Committee On Taxation, Letter To Congressional Office, 6/18/12)
“…those business owners are projected to earn 53 percent of the $1.3 trillion in business income that will be reported on individual returns next year. That, Republicans in Congress argue, makes those business owners an important engine for economic growth and job creation.” (“Obama Tax Plan No Small Deal To Small Businessmen,” AP, 12/10/12)
“…some business owners complain, would leave them with less money to hire new workers or keep the ones they have.” (“Obama Tax Plan No Small Deal To Small Businessmen,” AP, 12/10/12)
· “…Mr. Obama is demanding tax increases, not tax cuts, and large increases at that. … that includes tens of thousands of the most productive, fastest-growing small businesses—those most likely to hire workers amid a national jobless rate of 8.2%.” (“Off The Tax Cliff He Goes,” The Wall Street Journal, 7/9/12)
· “Dan McGregor, chairman of McGregor Metalworking Companies in Springfield, Ohio, said he and the other six shareholders in the business are looking at a tax increase of $250,000 to $300,000 next year under Obama’s plan. The company, which has 365 employees at five locations, does about $80 million a year in sales, McGregor said. … ‘I feel a $40,000 reduction is the loss of one job, so if it’s a $200,000 tax increase, that’s five jobs,’ McGregor said.” (“Obama Tax Plan No Small Deal To Small Businessmen,” AP, 12/10/12)
The Story of Business: The Opportunity to Compete
New Video
The Story of Business: The Opportunity to Compete
Arlington, Va. - Bankrupting America, a project of Public Notice, released its latest video in the “Story of Business” series looking at how burdensome government regulations impact real businesses struggling in today’s economy. The video profiles Jeff Lawrence, owner of Forefront Construction in Middletown, Penn., a commercial HVAC and plumbing company founded in April 2008, just prior to the financial collapse. Lawrence discusses how high taxes and government mandates are making it more difficult for his company to compete and thrive in today’s economy.
“We definitely have been able to stay afloat during this tough time, but there have been some obstacles put in front of us that have made the journey a little bit tougher,” said Lawrence. ”We’re a small business, and cash is king. Anything that could be done to lower taxes would be a help to our business. What the government could do to help get out of my way is to not mandate Project Labor Agreements, which don’t allow us to have a seat at the table because we’re not a union contractor.”
Forefront Construction’s story is one that resonates with small business owners across the country who are also facing higher taxes from Washington and endless bureaucratic red tape. After enduring four years of a struggling economy that hasn’t seemed to rebound, Jeff Lawrence believes many of the regulations and policies coming out of Washington are counterproductive. All he wants is an opportunity to compete.
“An even playing field is so important because it gives me the opportunity to compete. I’m not asking for anybody to give us any work; all I’m just asking for a seat at the table, to have the opportunity to bid the same jobs, to be able to bid the same work, and to be able to do the same work,” Lawrence continued.
Gretchen Hamel, executive director of Public Notice, issued the following statement on Forefront Construction’s Story of Business:
“Forefront Construction is an American story of what’s possible when entrepreneurs have the opportunity to compete and succeed. The problem in Washington is that too often misguided policies stand in the way. Instead of burdening small business owners with higher taxes and federal mandates, we should be helping businesses by making it easier to take risks and expand. With all the uncertainty surrounding the fiscal cliff, lawmakers should stop and ask themselves whether their policies are going to help or hurt job-creators like Jeff and businesses like Forefront Construction.”
Small Business Owner Gives Obama a Piece of His Mind
Fox Business – Some U.S. business owners got a chance Monday to meet with White House advisors and give their own take on the fiscal cliff, tax hikes and more.
Among the entrepreneurs invited to the discussion was Drew Greenblatt, president of Marlin Steel (www.MarlinWire.com
) — a small business in Baltimore, Md.It was unclear at press time if President Obama attended the meeting.
Ahead of the meeting, Greenblatt said he has one thing on his mind.
“We’ve got to increase job creation, fast,” he told FOX Business. “This recession has gone on too long, and now is the time for us to turn it around by creating certainty.”
As for those looming tax increases for those making above $250,000 annually, Greenblatt said he was going to deliver a message that the move would stunt economic growth and hiring. American factories, he said, are one example of a small business that pays taxes on a personal level of income. Increasing their tax rate will deter potential for economic gains.
Tax Tips For The Stressed Entrepreneur
There is something frustrating about the financial planning calendar. People need to make decisions by the end of the year, but that is exactly when the distractions of the holiday season are at their peak. There is an added twist for 2012: with the pending expiration of the Bush tax cuts, no one knows for sure what tax rules will be in effect for 2013 and beyond.
One still needs to do what one can. Bill Harris, CEO of Personal Capital, sets forth a checklist on Inc.com. The general theme is to accelerate as many deductions as possible into 2012, where the tax treatment is likely to be more favorable.
His suggestion on capital spending will be of particular interest to small business owners. The generous Section 179 write-off drops next year from $139,000 to $25,000, while the 50% “bonus” depreciation deduction goes away entirely. It makes sense in this environment to do one’s capital spending by the end of the year if possible.
It may be hard to schedule during the holiday rush, but a timely chat with your tax advisor by December 31 may be the best guarantee against Santa leaving a lump of coal in your stocking. Of course, there is not much one can do escape the longer term designs of a government (and an electorate) enamored of high tax rates.
Heritage: The Specter of Taxmageddon Rises
Originally posted at The Foundry by Amy Payne
On this Halloween, a truly frightening specter is looming.
No amount of garlic, crosses, or exorcists can help us—only Congress and the President can chase this ghoul away.
It’s Taxmageddon.
A horrifying combination of expiring pro-growth tax policies from 2001 and 2003, the end of the once-temporary payroll tax cut, and just a few of Obamacare’s 18 new tax hikes, Taxmageddon will be the largest tax increase EVER to hit Americans. It’s nearly $500 billion in one year, starting January 1. That’s two months away.
The number $500 billion is rather large and abstract, so The Heritage Foundation has broken down the expected tax increases per person just for 2013:
- Families with an average income of $70,662: tax increase of $4,138
- Baby boomers with an average income of $95,099: tax increase of $4,223
- Low-income workers with an average income of $24,757: tax increase of $1,207
- Millennials with an average income of $23,917: tax increase of $1,099
- Retirees with an average income of $42,553: tax increase of $857
And if that isn’t scary enough, the nonpartisan Congressional Budget Office has forecasted another recession in the coming year. The last thing this country needs is another recession, after years of high unemployment and months of a sluggish, barely noticeable recovery.
The tax hikes will hit small businesses very hard—and not just any small businesses, but the ones that create jobs. As Heritage’s Curtis Dubay and Romina Boccia explain:
The businesses that would pay the higher tax rates proposed by President Obama earn almost all the income earned by small businesses that employ workers. According to President Obama’s own Treasury Department, these job creators earn 91 percent of the income earned by flow-through employer-businesses. These are the biggest, most successful small businesses. They employ more than half the private workforce, according to an Ernst and Young study. Raising their taxes would destroy more than 700,000 jobs.
There’s one way to address Taxmageddon—reverse it.
Why hasn’t Congress acted to prevent this? Simple: The House passed a bill that would prevent the largest share of Taxmageddon, but the Senate failed to finish the job.
It appears this job will fall to the next Congress now. When the new Congress takes office on January 3, 2013, after counting the electoral votes for the presidency, the first order of business should be to reverse Taxmageddon. The congressional leadership and the successful presidential candidate should make clear right after the election that reversing Taxmageddon will be their top priority, to reassure businesses and employees as soon as possible.
If this future Congress also fails to act, as the current Congress has, then trick-or-treaters for years to come will tremble at the telling of this tale—a Congress who, when economic darkness threatened, chose this cruel and mysterious route of making things worse.
You’re Fired! America’s Strange Economic Recovery
Like many television viewers, I could not resist watching the first episodes of “The Apprentice”, which cemented Donald Trump in the popular imagination as THE mega business celebrity. And who can forget the famous “You’re Fired!” moments? Of course, that was entertainment, and one suspects that even the fired walked away with a fascinating experience and expanded career horizons.
The American public is now going through a much more serious round of “You’re Fired” events, and there is nothing entertaining about it. Three years into the so-called economic recovery, downsizing and layoffs remain a way of life. Indeed, they are increasing. Bloomberg reports that layoffs are at a two year high, as corporations shed jobs at a brisk clip in response to sluggish demand. The statistics are depressing:
North American companies have announced plans to eliminate more than 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011.
And they are not confined to a couple of troubled sectors. The layoffs are occurring in multiple industries and the diversity of the names is striking: Advanced Micro Devices, Cummins Engine, Dow Chemical, DuPont, Hewlett-Packard and Colgate-Palmolive have all recently announced cuts.
As big business downsizes, small business must step up to the plate to provide badly needed employment. But small business is facing the most challenging regulatory environment in a generation, and risks being swallowed by the whale of Obamacare.
At some point, the citizens have to ask themselves: “Have we been sold a bill of goods about the effectiveness of the stimulus and quantitative easing? Have the chattering classes just lost it? Is this economic recovery real?” The prudent voter knows the answer to these questions. It is high time to do to the current leadership in Washington what Mr. Trump did to many a hapless apprentice. But it’s about survival now, not entertainment
