Obama and Congress passed legislation in the stimulus package for small businesses. The aid comes in the form of guarantees for banks in order to make access to capital easier for small businesses. The SBA guarantees loans to banks that businesses could not get from other sources, that fall outside the parameters of lenders guidelines, etc.

According to statistics cited by the Coleman Report, SBA loans are up 60%. This is good news, banks are lending and businesses are getting money.

The ARC loan is 100% guarantee up to $35,000. However, the SBA’s ARC loan program, which is designed to aid “viable businesses” expects to see default rates of 60% according to Coleman as well.

The 7(a) loan program for start-up, working capital, equipment, etc. has been increased to 90%. This is 90% of the loan value, not loan to value. In other words, if the company has or needs $200,000 in assets to get going and needs a loan to expand or whatever and the bank guarantees 80%, the loan to value is 80%. The SBA guarantees 90% of the $160,000 – which is different than a 90% loan to value. 90% of 80% is 72%. If the loan to value is 50%, then the 90% guarantee would be 90% of $100,000 for example. Also contained within the package is fees are reduced or waived, until the program runs out. In order for the modified loan guarantee program to continue, according to one official, the SBA would need an additional $480 million dollars to continue.

The 504 program is for bigger needs such as real estate and major equipment.

Loan amounts are being raised to $5 million dollars to make access to capital easier.

All is well and good, but here is where you will see why businesses may not get the funds they want and why programs do not work as they boastfully proclaimed as successful.

First, banks sell money, just as any other business sells products. The government guarantees riskier loans, in order to allow banks to lend. FHA is very similar in real estate.

Next, even if taxes are not officially raised, other accounting laws can hinder business causing more taxes. To give you an idea, if you sell and item and record the cash and have to carry the cash on balance sheet as an asset with the sale being considered a liability at first, the assets blow up in a big way. If a company is taxed on their assets, more taxes are incurred. This can affect the gain on a sale which affects income for tax purposes as well.

Continuing right along, regulators are requiring more capital from banks. If the cash account, for as mentioned in the previous example, goes from $20 million to $60 million with a 10% capital requirement, you can see that the bank would now have to come up with an additional $4 million in reserves. Could a bank be insolvent overnight because of a new accounting law?

Another point not really discussed anywhere is that Obama wants pool originators to guarantee 5% on 504 loans, such as those for property. The pool originator is simply a broker who finds buyers (investors) for the loans from banks. These originators aren’t going to go for this and may not push SBA loans, too much capital for the originators to come up with. This is like telling a car salesman to personally guarantee the car they just sold.

Since investors are mentioned, increasing loan amounts adds greater risk to a portfolio. If a portfolio has a certain dollar amount allocated, bigger loans kick out the smaller loans thus increasing risk. Think of a pie. If one piece falls out, would you rather have a pie that had 4 pieces or 8 when one goes?

Back to investors again, which may include your 401k or mutual funds. The tax laws may be left alone for 2010 given the current economic times, but will change in 2011. See for yourself at the Wall Street Journal.

Then there is healtcare. This looks to be a big killer of business and jobs.

Finally, being tied to the government for assistance has definitely shown why businesses do not want government involvement. Red tape, restrictions and control, etc.

As you can see, there is more to the story than just “increasing access to capital”.  It is true that business has been helped to some degree by having access to capital.  However, the memo of assistance looks good to the press, but the devil is in the details. Politics, accounting and tax laws, regulations and banking practices all play a big part. And some may simply decide not to play.

In June of this year in Cairo, Obama said he wanted to create an exchange program to help Muslims come to America and for Americans go to Muslim countries to learn.

According to Reuters, yesterday, Hillary Clinton followed up supporting the programs in entrepreneurship, etc. in these countries as well.

Here are a few points to consider.

To begin, aren’t many of the Arab nations oil rich countries?

“Aid” –  isn’t that generally in the form of giving money, not a loan to be repaid? Who pays for this? The American taxpayers.

Bailouts for companies such as GM came from taxpayer dollars only to have the company go into bankruptcy and come out in about a month. Yet, shareholder lost when the value went to $0 and taxpayers will pay for this and other companies as well.

Next, Obama and the SBA want greater access to capital for small business.

What does access mean? Loans – not bailouts, grants or free money, but loans.  Higher loan amounts and guarantees.  Loans from the Treasury to community banks to lend.

The SBA guarantees loans to banks that borrowers could not obtain elsewhere. Therefore, the loans generally do not fit within guidelines of the bank’s practices or the borrowers may be more risky. Who picks up the tab when the SBA has to purchase the loans from the banks when the loan goes bad? Taxpayers.

Programs exist, paid by taxpayers, such as Small Business Development Centers, to assist entrepreneurs and existing small businesses.  The good news for taxpayers is that the idea is for these centers to help companies create jobs and capital formation.  This is a local benefit for the taxpayers, not overseas aid.

I would much rather “aid” and money stay at home for a while helping local and small businesses first.  Therefore, why not loan money to the other countries and use those profits to aid domestic companies instead of having the US taxpayers pay for everything, everywhere?

In my previous post, “Do you really want a lower interest rate?“, I showed the correlation to low rates, job losses, the economy and the markets.  Lower rates are not that good – for everyone.

However, most people want a lower rate but very seldom, if ever, have I heard anyone mention this correlation.  I take that back, my friend Jerry, use to say to clients “I hope so” when he was asked if rates were going higher.

Higher rates are good for the bank, which Jerry was a lender, but Jerry and I knew what higher rates meant as well.

Higher rates are indicative of a better economy.  In the following article from CNN Money about the G20′s economy, the article sites that Australia is raising rates 25 bpt.  Bpt is basis points and 25 bpt equates to 1/4%.

To finish talking about the interest rates and the economic times, Australia is outperforming other countries and may raise rates over the next year as well.

The next year could look good for investors, employers, employees and the economy; therefore, enjoy the higher rates.

The following video is from Colorado, but it could be coming to your city soon.

The idea about giving tax credits to business is to stimulate jobs. Enterprise zones are designed to revitalized distressed areas. Giving entrepreneurs and business incentive is to succeed and excel will create wealth…not only for the owners but for the employees, community and citizens as well.

With the economic downturn, governments are looking at increasing taxes in order offset losses of revenue. However, increasing taxes will decrease their revenues. The Laffer Curve basically says, when a government taxes you too much, why work? All the profits go to the government. This can apply to an individual or business.

Getting back to the video, the government sees eliminating tax credit as a revenue source. However, businesses know demographics and there is a reason for these distressed areas. They do not want to be there. Ever heard “Location, Location, Location”? Generally, the level of risk for a business is higher in these zones as well.

Eliminating the tax incentives will only keep business out thus job creation or retention may not occur, or even worse, more job losses which all will result in a further loss of revenue for the government.

So are tax credits more costly than losing business?

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