Want more jobs? Open wallets for small businesses

Kevin Klowden
Director, California Center; Managing Economist

Over the past few weeks, the Obama administration has
been touting initiatives in the Small Business Jobs Act,
the American Recovery and Reinvestment Act, and other legislation passed in
2009 and 2010 as a sign that it is pro-business, and in particular, pro-small
business.

Here at the Milken Institute, we’ve repeatedly noted
that small business is an essential component of any economic recovery. From
the first quarter of 2008 to the second quarter of 2009, businesses with 50 or
fewer employees shed a staggering 2.9 million jobs. While small businesses are hiring
again, they are not doing so at a rate nearly fast enough to reach their
pre-recession level any time soon. Still, while White House efforts in this
area have been solid, the single greatest remaining concern among small
businesses persists: the lack of access to credit.

The issue of credit for small business is not simply a
matter of business as usual; it’s actually a key impediment to hiring. During
the financial realignment that took place during the Great Recession, small
businesses saw significant constraints placed on two of their most important
means of accessing revolving credit: credit cards and real estate equity. While
the equity issue is a direct consequence of the collapse of the housing bubble,
the slashing of credit lines attached to business credit cards has had a more
profound impact.

According to the National Small Business Association, the
credit crunch was listed by small businesses surveyed as their greatest challenge
both in July and December of 2010. In addition, the percentage of small
businesses using credit cards as their primary financing source declined from
49 percent in 2008 to 36 percent in 2010. By last July, 36 percent of small
business owners surveyed had seen their credit decrease in the previous six
months. Further, this lack of credit has ominous ramifications. Some 64 percent
of small businesses surveyed do not plan to hire in the next six months, the
bleakest hiring outlook since early 2008.

Although the White House did make an effort to improve
the Small Business Administration’s ability to facilitate guaranteed loans and
credit lines to small businesses, the fact remains that the SBA is involved in
only a very small share of small business loans. In addition, most of the
additional funds connected to the SBA were part of temporary stimulus
provisions that are scheduled to expire in the next budget.

Although the situation has improved, the fact remains
that the mechanisms for extending reliable and consistent lines of credit for
small businesses remain constrained. To boost hiring by small firms at a rate
necessary for a strong recovery, the administration will need to provide an
effective combination of short-term incentives for small business lending by
banks and other institutions (such as establishing a new class of more flexible
credit card and business loans directly tied to business specific expenses) and
a long-term mechanism for the expansion of stable small-scale business loans by
community lenders and allied institutions (including partial investment
guarantees for institutions providing capital to community lenders and further
tax incentives and guidelines for banks that provide small business loans to be
used for hiring up to 10 people).

Tax breaks alone won’t do the trick. They’ll help the
long-term balance sheets of small businesses, but they don’t provide the credit
needed in the here and now.

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