On January 13th I attended an FDIC held Small Business Lending Forum in Washington D.C which brought policy makers, regulators, small business owners, lenders and other stakeholders together to discuss the obstacles in small business lending. The forum raised more questions and problems rather than provide any substantive answers on how or what needs to be done to stimulate lending for small business…
While it was very encouraging to hear the more optimistic outlook from Chairman Bernanke on the economy, as well as an optimistic assessment of the regulatory environment from Chairman Bair, the lack of an effective plan to stimulate small and startup businesses was evident.
There were some common thoughts and themes:
- There is a lack of early stage capital
- Strong banks continue to lend
- We need a better appraisal process
- Banks should be relying on strong underwriting instead of collateral based loans
- Need to remove the uncertainty in the financial sector
- Real estate is the colateral basis for most small business loans
No one addressed the issue of how to provide loans to a small business that either does not have collateral, or has collateral value that is now impaired, and where cash flow is impaired because of the economic maelstrom.
If we are to support the small business sector, government will have to get involved and create the incentive to do so.
Most small and new businesses in one way or another rely on real estate to support their ventures…
- 95% of small business owners own their own homes
- 50% own the building or property that they run their business out of
- 60% own investment real estate
Clearly, real estate plays an important role in the life of a small business owner…
If businesses want to use the equity in their homes or other commercial real estate, why can’t the Federal Reserve allow for a future appreciation right to be attached for the purpose of creating capital? The warrant would self liquidate by granting a tax incentive or credit for any future profits of the business..Over a long enough time horizon, it is hard to imagine a scenario where the Fed would actually lose money.
Banks would receive a fungible source of collateral, the small business owner would get the funding they need, and the cost to the system would be negligible, or if done right, nil…