Financial Reform: Good for Small Biz?


Are small businesses lining up behind the financial reform bill being bandied about in Congress right now?

Not specifically. Small business groups have been hectoring banks for two years now to open its credit lines and start lending to small businesses again. But that hasn’t been happening, and the reform bill doesn’t fix that.

According to U.S. Treasury Department figures, major U.S. banks had cut business loan balances by $1 billion in October 2009 alone, and small business lending was down significantly for the entire year.

It also seems that banks have been arrogant about turning their backs on small business owners. From late April to the end of 2009, bank lending to small businesses fell by 11.6% according to filings with the Treasury Department. That has U.S. economic royalty seriously ticked off. Federal Reserve Chairman Ben Bernanke, in a speech in Chicago last week, took banks to task for not lending to small businesses.

"Business conditions for borrowers have worsened as well," Bernanke said. "Right now small business conditions are much tighter than anytime in recent memory. We need to find a balance that makes economic sense."

Banks should be "making good loans that are expected to be repaid," but "not be so conservative and restrictive that they turn away" credit-worthy borrowers, he added.

But given the fact that U.S. small businesses created 65% of all jobs in the past 16 years, you’d think that a big part of financial reform would be to ease credit and lending programs to small businesses.

You might also think that, by and large, the financial reform package might be friendlier toward small businesses. But plenty of economic experts beg to differ.

Mark A. Calabria, director of financial regulations studies at the Washington-based Cato Institute says portions of a key component of the reform bill — the development of a new Consumer Financial Protection Agency — could increase litigation costs for lenders. No doubt, banks will pass those costs down the line to small business borrowers, making it even tougher to get a loan.

Another lending resource favored by small businesses — angel investing (i.e. business funding from wealthy individuals to new companies) may also trip up small businesses. Here’s how. Currently, angel investing is unregulated by the U.S. government. But despite no evidence that the angel community contributed to the economic collapse, Washington now wants small business start-ups seeking angel funding to file financial documents with the U.S. Securities and Exchange Commission.

That could result in delays for small businesses in getting funding, as the SEC has a 120-day review process for all filings. It also likely means increased costs to small companies, as they’d have to hire lawyers to handle the legal process of reporting to the SEC.

CFPA Concerns, Support

The U.S. Chamber of Commerce, which is lobbying against the reform bill (specifically, the Consumer Financial Protection Agency portion), has created a new Web site called

The Chamber is taking this case directly to the American people, painting the CFPA as a “Big Brother” agency that would “tell small business what to do.”

Some points of concern, as listed on the Web site, by the Chamber include:

  • The CFPA would restrict access to credit for small businesses and consumers at exactly the wrong time.
  • The bill takes a one-size-fits-all approach that fails to recognize the differences between small business owners and consumers.
  • The CFPA would regulate non-financial businesses that had nothing to do with the financial crisis or the consumers that were harmed.
  • The CFPA would subject businesses to a complex and confusing maze of state and federal regulations and liability.

Says the Chamber in a statement: “What is being proposed will result in a significant reduction in the availability and affordability of credit for consumers and small businesses at a time when they need it most.”

But other groups see the CFPA issue differently, including the U.S. Women’s Chamber of Commerce, the U.S. Hispanic Chamber of Commerce and the Main Street Alliance. These groups have come together to launch a Web site that supports the financial reform bill, and the CFPA provision called Business for Shared Prosperity.

On the site, the group has a petition that says small businesses should be supporting the CFPA. It makes the following points to support that argument:

  • Small business owners often rely on credit from a variety of sources, including use of personal credit cards and home equity loans, to start, run and expand their businesses.
  • Business owners and consumers need full and fair disclosure of the costs and risks of financial products and services.
  • Those pushing misleading products with hidden risks undercut lenders offering sound mortgages and other credit. Many businesses that survived the initial meltdown are being hurt by credit cuts and denials, abrupt interest rate and fee hikes, and other financial practices.
  • A Consumer Financial Protection Agency will expose unsafe products and services and encourage accountability and fair competition.

What’s the takeaway for small companies?

Certainly, more transparency from lenders would be helpful to small business owners, and that’s a big part of the CFPA. But that could be outweighed by the obstacles set out by the reform bill's push against angel investors, and the lending requirements that could result in small businesses being hit by higher fees and rates as big lenders pay for the increased legal costs of the new legislation.

In the end, private lending is the lifeblood of U.S. commerce. Anything that gets in the way of that can’t be spun as “good” for small businesses. Right now, there seems to be an obstacle or two in the financial reform bill, and we’ll just have to see if those obstacles survive the final cut up on Capital Hill.

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