The TARPing of small business — DailyFinance
The TARPing of small business
Douglas McIntyreDouglas McIntyre RSS Feed
Dec 11th 2009 at 5:00AMA plan that would use part of the TARP pool of funds to aid small business is gaining momentum among Administration financial leaders. The lead story in The Washington Post on Dec. 11 says “One plan under consideration involves spinning off a new entity from the Troubled Assets Relief Program that would give banks access to federal funds without restrictions, including limits on executive pay, as long as the money was used to support loans to small businesses.”
The plan may actually work if it can overcome a modest number of high hurdles.
The first of these is that small businesses may not want to hire new workers even if they have access to low interest rate loans or tax credits. The credits are not part of the TARP proposal but have been discussed in Congress. The recession may be over in the minds of economists, but consumers and small business operators are still facing a market with high unemployment and extremely cautious customers.
Adding workers may appear to be a good idea. It increases the capacity to create goods and services for companies as the economic rebound accelerates. But if the economy stalls, it simply adds new layers of cost. Most businesses are tempted to squeeze maximum production out of the workers they already have.
Banks may be reluctant to loan money to small businesses, even if the government helps back the loans through offers of low interest rates on the money being used for small business aid. Many small businesses are big credit risks. They often rely on monthly cash flow to make payroll and other expenses and they often have modest customer bases for their revenue. Many small companies have no assets to pledge against bank loans. For banks, a loss is a loss, even if the government has provided cheap capital to help provide the loans.
