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Small Business: Too-Big-To-Fail

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Small business will lead us out of the recession and fuel the recovery. That is the belief among many of the nation's economists. To understand the role Small B plays in society, here are some basic statistics.

The Small Business Association reports that from 1993-2008, 64% of new jobs were created by firms with 1-499 employees.

"Small businesses employ just over half of U.S. workers. Of 119.9 million nonfarm private sector workers in 2006, small firms with fewer than 500 workers employed 60.2 million and large firms employed 59.7 million. Firms with fewer than 20 employees employed 21.6 million."

The numbers reveal that supporting and strengthening our nation's largest employer, Small Business, is a financial imperative.

The February 5, 2010 "jobs report" revealed that one million more jobs were lost in 2009 than was previously thought. The good news is the national unemployment rate decreased slightly from 10.3% to 9.7%. According to one economist, the unofficial unemployment rate is more like 17% when including all those ineligible for unemployment: sole proprietors, freelancers, consultants, long-term unemployed and temp workers. Another economist said the real numbers were closer to 22%* if underemployed workers were included (employees whose wages and hours have been substantially reduced). If we examined particular sectors like housing or retail, the numbers might double. Clearly, the state of unemployment in the U.S is in critical condition. Job growth reached its lowest level in 26 years in October 2009.

Something must be done to turn things around and fast.

Small Business Credit Frozen

Unlike big banks and big corporations, Small B does not have piles of excess cash to draw from. Limited access to liquidity is the nature of being "small." Most owners draw capital for investment and expansion from business credit lines, corporate credit cards, personal assets, and bank loans.


Since the fall of Lehman Brothers in September 2008, small business owners are painfully aware that available credit has evaporated. For any business, other than big banks or large corporations who can simply issue debt for sale (bonds), the credit freeze is as dire in February 2010 as it was in October 2008.

Over six months, from April 2009 to October 2009, "The 22 banks receiving the most bailout money reported to the Treasury that they had decreased small business lending by $11.6 billion." In October 2009, the U.S. Treasury reported another $1 billion for small business was eliminated," as a consequence of the banking crisis.

While the global credit crisis compelled the United States government to take emergency measures to liquidate the nation's largest financial institutions, small business was left in the cold. After three trillion dollars worth of government aid to the nation's lenders, credit is still not flowing beyond the top of the food chain.

Begging Banks for Money

In December 2009, President Obama urged TARP banks once again to investigate "every responsible way" to increase lending, claiming that rescued banks were "obligated" to help American business after being saved by taxpayers. They did not agree. No amount of noblesse-oblige would get "Fat Cat bankers" biting. "No matter what the President says, we are not lending," claimed one banker anonymously.

Understanding that credit to Small B must be resuscitated as a matter of urgency for the nation's employment rolls, the Big O is at it again with hopeful entreaties to the nation's smaller banks.

"I"m announcing a proposal to take $30 billion of the money that was repaid by Wall Street banks, and use it to create a new Small Business Lending Fund that will provide capital for community banks on Main Street. The more loans these banks provide to creditworthy small businesses, the better a deal we'll give them on capital from this Fund"this will help small banks do even more of what our economy needs - ensure that small businesses are once again the engine of job growth in America." President Obama, February 2, 2010.

Yet community banks are not lending either. Why, you may wonder? According to finance blogger Barry Ritholz, because it is "rational."

"Banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND. Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios."

Looking closer at the President's "creditworthy small business" remark".If you were a bank would you lend to real-estate agencies, architect firms, housing developers, retail boutiques, or local jewelry shops? These are a few of the businesses in my neighborhood hanging on for dear life while waiting for the tide to turn. How long can they wait?

Americans are going to buy or rent homes again. Builders and architects will continue to create them. People will still want engagement rings. The neighborhood coffee shop will continue to feed the locals-in normal times at least. These are not obsolete business models, yet revenues and customers are scarce. What bank would/should risk lending to them in an uncertain economy? Yet should a recession allow us to turn our backs on businesses that have served the community for dozens of years?

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Monika Mitchell is the Chief Executive Officer of Good-b (Good Business International)a leading new media company xcelerating the movement for better business for a better world.
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