Thursday, July 29, 2010

It’s Time To Put The Small Back In Business

by Alexandra Lebenthal

There has been a lot of debate in the media and in Washington about how to get the economy going again. While TARP or the more colloquial “bailout”, was fraught with controversy, to date it has earned a profit for the government, put our teetering financial system and institutions back on their feet, and, ultimately led to the creation of strong new regulations to ensure our financial institutions will never be able to risk so much of their capital so as to jeopardize our entire global financial system again. Still the pundits will argue whether it was the right fix for decades.

But righting America after an economic earthquake of the magnitude we have seen requires more than fixing the largest financial institutions. Now it is time to complete the work that was started with TARP and the Obama Recovery Act of 2009.

It is time to look beneath the largest trees in the forest and give nourishment to the small ones.

For not only do small trees have the potential to become large trees, but they are a part of our economic ecosystem that enables us all to prosper. In our economy those small trees are represented by the hundreds of thousands of small businesses that are part and parcel of the fabric of our country.

Unfortunately, however, many of those businesses are still hampered by lack of capital. Without capital they cannot expand. They cannot hire. They cannot buy new equipment. They cannot lease new space. Without capital their businesses stagnate, adding to the economic malaise in which our country still lingers.
When larger businesses seek capital they typically have several avenues available to them beyond traditional bank loans. There is capital in the form of private equity or debt financing. For small businesses however these opportunities are few and far between. If debt is available at all it often is at such high rates of return (20% or more), that simply paying the interest, realistically might put the company out of business.

Yet, a valuable type of capital does exist to assist these businesses in the form of loans available through the Small Business Administration (SBA).

While officially created in 1953, ironically its predecessor was founded during the Great Depression under President Hoover at a time when the country also needed every economic tool at its disposal to keep businesses running.SBA loans currently are available up to $2 million for businesses that generate approximately $5 million in revenues. The rate is capped at the current Prime Rate plus 2 ¾% for loans of seven years or longer, much more manageable than the 20% rates from other lenders.

In February 2009 in the depth of the financial crisis the Obama Administration passed the American Recovery and Reinvestment Act of 2009 which amongst other things provided $375 million to temporarily eliminate fees for the remainder of 2009 on SBA loans. The bill also raised the SBA's guarantee percentage on some loans to 90 percent.  $255 million was provided for a new loan program to help small businesses meet existing debt payments and $30 million was allocated to expand the SBA’s Microloan program.

As a result, small business loan activity increased significantly. From Feb. 17, 2009 to July 16, 2010, weekly SBA loan dollar volumes rose more than 90 percent compared to the weekly average before passage. More than 1,379 lenders who had not made a loan since at least 2007 made loans. What is more, a significant share of loans went to rural (24 %), minority-owned (21 percent), women-owned (18 %), and veteran-owned (8 %) businesses, the very companies that often have the most trouble finding capital.

Who are these small businesses? They are on your street, and in your city. Here are a few examples of how SBA loans have made the difference.

Husband and wife team Becca and Paul Steinman share just about everything, including a small business. Quist, (Quality, Utility, Innovation, Style, and Technology) is the Steinman’s screen printing/graphic design business located in Brooklyn’s Red Hook neighborhood. Frustrated by the lack of quality shirt printing companies, the couple started the company in 2000. With each of them having a visual arts background the couple created a unique way to be involved in the design process by learning to screen print themselves.  They purchased the basic equipment for the process, and by word of mouth, marketed their new small business to artists and customers.
Like many other small businesses, Quist had been affected by the challenging economy. However, Quist received a SBA loan for $215,000 which included money saving provisions under the American Recovery and Investment Act so they were able to secure the loan without paying the usual guaranty fee saving $5,805. This loan helped the couple retain their employees, move to a better location and purchase equipment.

“We came through the worst recession for us by personal touch,” said Paul Steinman. “Clients come to us because we take care of people. We treat our clients like human beings and take good care of them.”

Northwoods Paper Converting (NPC) in Beaver Dam Wisconsin has been providing paper mills, printers and merchants high quality paper converting services since 1999. Paper converting can be described as a process by which paper is used to fabricate another paper product. like envelopes, paper bags, boxes, and containers.

NPC employs 70 full time employees and 10 part-time employees. They are hoping to add 10-15 people in the near future. NPC used an SBA loan of $985,000 to expand to a new building. combining two locations, which previously meant a lot of inefficiencies. This new building addition will add 95,000 square feet to their existing 60,000 sq/feet and will allow them to store more materials.

Now that they have expanded the building they are looking into another SBA loan to purchase a new “sheeter,” a device used to cut raw paper rolls into specific rectangular sizes, to get into the copy paper business.

“The SBA loan was a great option for us,” said President Chad Abel. “It was very attractive to the company because it saved us money with the elimination of fees and helped our cash flow by getting a 20 year fixed-rate term.

Mama Roxy’s is an Italian Restaurant in Rochelle Park, NJ near Paramus, just a block away from the Garden State Mall, run by Peter, Roxanne and Ted Mastorakos. They used a $1.3 million SBA loan to purchase land and construct a new 8,335 square Italian restaurant. Under the Recovery Act, the 1.5 percent fee of the loan was waived, saving the family $20,100 in fees. Opening their third restaurant meant the Mastorakos were able to create 60 new jobs. For a town whose population is barely 5500, 60 jobs represents more than 1% of the town.
The country needs more. We remain in a recession with many fearing a double dip. For every Quist or Mama Roxy’s or NPC, there is a company that has not been able to find capital, are struggling to survive or may already have declared bankruptcy. When businesses struggle, layoffs of workers become inevitable. While never easy even in large companies, to a small business owner, firing good employees that are like family is a painful choice to make.

But there is hope! In the next several days, the Senate will vote a bill that would establish a State Small Business Credit Initiative that would support new lending through State-based programs, continue the provisions enacted in 2009. The bill would also provide amongst other things, the following:

• Assisting struggling small businesses with a new loan program, which provides no-interest, deferred repayment loans of up to $35,000 to viable businesses to help them make debt payments.

• Expanding loan eligibility to more than 70,000 small businesses through a temporary alternate size standard.

• Increase Small Business Administration (SBA) Loan Limits from $2 million to $5 million.

• Create an Intermediary Lending Pilot program, which allows the SBA to make direct loans to eligible nonprofit lending intermediaries, in turn allowing them to make loans to new or growing small businesses.

The SBA estimates that the loan increases would increase lending to small businesses by $5 billion in the first year.

Some opponents of the Bill have termed it a second Troubled Asset Relief Program, because community banks would be able to access capital to boost lending to small businesses. Unlike Tarp, however, in which most of the funds went to the largest institutions, this program targets those banks that make the vast majority of small business loans.

While many of the financial institutions receiving Tarp funds failed to use that support to make the business loans needed to boost our economic recovery, this program's whole purpose would be to increase small-business lending." It puts the money right into small business loans rather than giving it to banks in the hope that they will lend, not shore up their balance sheets. Sen. George Voinovich, R-Ohio, was recently quoted as saying, "This isn't Goldman Sachs, this isn't AIG, this is the banker down the street ... It provides $30 billion for local banks to make loans to local businesses."

We hear a lot about big government, too much spending, and bailing out banks but when the government can provide businesses the tools that allow them to grow it helps us all. When Becca and Paul Steinman or Chad Abel or the Mastorakos family were able to get loans for their companies all the talk about big government turns into America helping its citizens and in turn those citizens helping the country. This is capitalism and our government at its best.
Alexandra Lebenthal learned from her father, Jim Lebenthal, and grandmother before, about the basics of finances and investments. Today she is the CEO of Lebenthal & Co., LLC and its wealth management division, Alexandra & James Co.