How You Can Start and Operate a Soup Kitchen

Mission Possible: How You Can Start and Operate a Soup Kitchen

“A Better Approach to Spurring Small Business Growth”

The Trenton Times Newspaper, Octobert 20, 2010
By Martin Tuchman, CEO Tuchman Group and Vice Chairman, First Choice Bank

The Obama Administration’s heart and head are in the right place with regard to their desire to spur America’s small businesses. President Obama is right in seeing this country’s small businesses as the economic engine of job growth.

Encouraging small businesses to grow, hire more workers, raise their worker salaries and purchase new equipment needed to handle more activity could go a long way towards improving the nation’s economy. Data indicates that small businesses have created roughly 70 percent of the new jobs in the last decade. Clearly, energizing small businesses is the key to reversing the current depressing unemployment trends.

The latest idea to come out of the administration is to transfer $30 billion in leftover TARP funds to create a Small Business Lending Fund. The Fund would be separate and distinct from the TARP Program. The $30 billion would be directed to 8,000 community banks with $10 billion or less in assets. The program would not have TARP-like restrictions with regard to warrant and executive compensation requirements.

Banks with less than $1 billion in assets would be eligible to receive capital investments up to 5% of their risk-rated assets. The dividend rate for capital investments provided under the program would begin at 5%, but banks that boost their lending to small business by 10% over a baseline in 2009 could pay a dividend rate as low as 1%. Banks with between $1 and $10 billion in assets would be eligible to receive up to 3% of risk-weighted assets, with reductions to as low as 1% based on increased lending.

The purpose of the new initiative is for community banks to lend this money to small businesses.

The problem with this poorly thought out plan is that neither the banks nor the small business community need this type of structure.

Let's start with the bank. The last thing a bank needs is to be saddled with additional debt at 3%-5% (when all the "too big" banks are receiving funds at 1/4 of percent). Then, if the community bank "fails" to meet the lending requirement specified by the regulators, the rate rises to 7%.

The small business owner already drowning in debt that can barely pay certainly does not need more of the same.

The best way for the government to help small businesses is to give an incentive for those who have accumulated surplus funds to invest pure equity into small businesses. This would give these smaller companies an opportunity to compete, bring new products out, and grow without the burden of debt. The incentive to the investor could take the form of an investment tax credit, while the investor would purchase convertible preferred stock in the small company.

What is required today is a recapitalization of the balance sheets of the smaller companies. This is similar to what the US government has done for the larger banking sector by purposely holding down interest rates, allowing the big banks to keep borrowing costs low while they continue to reap the higher revenues on loans they have outstanding. This is a form of recapitalizing the big balance sheets; driving in billions of dollars of "profits" for the larger institutions.

An example of a transaction is as follows. A small business is marginally breaking even, or producing a small loss. If they could grow, increasing their critical mass, they would become profitable. Instead of layering on additional debt that would eat into their fragile equity position, not allowing for sufficient time to develop their plan, why not allow for an equity infusion? An investment tax credit of 15% can be granted to private investors so as to beef up their return if the investment is successful, or give them some downside protection if the investment runs into difficulty.

Then the local banks can provide some shorter term financing, due to the stronger balance sheet of the small company.

The small banks would then receive an investment tax credit of 10% of the loan. This tax credit can be used to offset any income from any operation of the bank.

By using this approach we are effectively recapitalizing the balance sheet of the smaller community companies.

The tax benefits will not only help create a healthy business environment by preventing the failure of the smaller companies, but also serve to create jobs that would, in turn, create tax revenue. Further, these benefits are also important to entrepreneurs in order to attract investors to their companies and to investors to minimize the risks in the investments and increase their rate of return.

This allows private equity to do what they do best: invest in growing businesses and allow banks to lend to a stronger credit.

This two-pronged approach will be extremely politically popular and community friendly, while being effective in re-starting the nation’s economic engine.