On Monday, President Obama signed into law the Small Business Jobs Act, hailed by the administration as “a great victory for America’s entrepreneurs,” and promising to provide loans that small businesses have been waiting for. The administrationis hoping that doling out taxpayer money to the tune of $30 billion to community banks will ensure that small businesses will rush to increase their debt and grow their businesses, adding new jobs that are desperately needed. But not so fast...unfortunately, this tactic appears to be a solution in search of problem. 

To put it mildly, the response to the bill has been very mixed.  Of course, there are “small” businesses who claim they will rush out to get that loan they’ve had trouble securing, but chances are the reason they haven’t gotten that loan until now has nothing to do with the bank not having the money to lend.  William Chase Jr., the CEO of Triumph Bank in Memphis reported to AP writer Pallavi Gogoi that his bank already has enough money to lend and it’s not about to bring the government, his primary regulator, on as a partner.  He claims “Our business customers are mired in uncertainty and are reluctant to invest in their businesses.” David Jones, who owns Dallas-based CardLab Inc., agrees with Chase.  He’s not about to take on debt with so much uncertainty out there.  The only way he’s going to hire again is if he can get some equity investment in his company.

The National Federation of Independent Business (NFIB) reported in August that 91% of small business owners they surveyed claimed that all their credit needs were met.  In fact, small business plans to expand, particularly with capital expenditures, are at a all-time low.

If uncertainty is one of the biggest reasons this bill will not produce the results the administration wants, the second biggest reason is that it actually is not in the community banks’ best interests to partner with the government.  Why?  Most banks already have more money than they need to lend to small businesses. Furthermore,the AP reports that under the bill, the government will buy stock in the banks that qualify and those banks will have to pay a 5% annual dividend to the U.S. Treasury, putting the Treasury essentially in control of the banks. Isn't that great!  The dividend rate does decline on a sliding scale if a bank increases its small-business lending, but if it doesn't increase its lending, the dividend payment increases to 7 percent.  Looks like the Treasury wins no matter how the game is played.  But you can also see the problem for community banks when small businesses aren’t taking out loans because they don’t have customers.  This is not a pretty picture.

They say don’t look a gift horse in the mouth, but gifts from the government always have strings attached.  This is one gift horse I’d give back.