Stimulus loans for small businesses rely too much on banks
Any moves to stimulate the economy and help small businesses right now have a tough standard to meet- they must work, at least marginally. Congress passed a stimulus bill last week that calls for $349 billion to be set aside for small business loans. In this case, the missile will not meet its target.
There is a glitch in the plan- it delegates authority to make and approve the small business loans to 7(a) lenders, banks like Wells Fargo who make SBA loans. It is good that money is being provided for loans, but the vehicle for those loans is poor, as banks are not very agile and are slow to make loans in uncertain times. Anyone who has ever applied for a loan, even in a good economic climate, can attest to this fact. Today, we need a Ferrari, not a horse and buggy.
The speed of the developing crisis and the resulting economic fallout are concerning, and solutions need to match that speed. For perspective, while it is true that the high unemployment watermark of the Great Depression was 24.9 percent in 1932, it took three years to get there. Today is different. Jobless claims were 3.3 million on the last report, staggering numbers when you consider that the average monthly number has hovered around 250,000.
My particular worry is that many small businesses have little, if any, cash reserve and do not have time to spare. The government should get money directly to businesses that employ people under a promise not to lay off more than some small percentage of workers for at least the next year. Businesses, especially small businesses, need money right now, not three or six months from now as money crawls through the banking system in a traditional Keynesian approach.
The advantage we have today, unlike 1932, is technology. A simple website could be produced in a few weeks where business owners could apply for as much money as they need. I was a technology entrepreneur for 20 years. A platform like this is fairly easy to develop and deploy as long as the site could link to a funding source in the government and there is a straightforward API. Like the Lend Lease program during World War II, it should be given a name that inspires some confidence.
As a people (the government is the people), we lend a business the money at a low interest rate of 1 or 2 percent, and the business owner or large business, borrows the money and promises to start paying it back in a year. Very simple amortization options could be set up to make the site easy to use, which would be very important. The key is to instill confidence and provide time to get the health care system in order.
Some reading this might be skeptical about this approach, as they should be, but simple safeguards could be put in place. Any technology platform could validate a Social Security number (in the case of a sole proprietor) or an Employer Identification Number (EIN) in the case of larger businesses, and a few additional security precautions around identification would ensure that the business borrowing the money is a real business. Incidentally, businesses would know this is a loan from the federal government, which will be registered and tracked.
There may be some defaults in the future, but I believe most people, especially small business owners, are honest and patriotic and will work hard to pay the money back.
Within months of the Japanese attack on Pearl Harbor, we were converting our factories to the production of weapons. In 1941, we were producing about 500 military airplanes per month. By early 1942, that number was more than 1,800. Our country has faced significant challenges in the past, but we have forgotten about them or just heard stories about them through family members. As a lot, American people are a resilient group, especially when we trust each other and work together.
Brian Hamilton is the co-founder of Sageworks, where he developed ProfitCents, an artificial intelligence platform used to help millions of small businesses understand their financial information. He is also the founder of the Brian Hamilton Foundation and Inmates to Entrepreneurs, both national organizations that help small businesses.