Easing Access to Credit: Pros and Cons

By Karen E. Klein
BusinessWeek 

Over the past few weeks, President Obama has unveiled multiple plans for aid to small businesses, including lowering loan fees, increasing guarantees on government-backed loans, and buying up to $15 billion in Small Business Administration-backed loans. But will the new programs unfreeze credit as they are intended to do? And how can entrepreneurs take advantage of the warmer climate if they do? . . .

But (Sanford) Ehrlich (executive director of San Diego State University's Entrepreneurial Management Center) cautions entrepreneurs struggling to keep their heads above water not to think of loans as life preservers. "If your company is going under, do a realistic evaluation about whether you need to liquidate. Don't take on more debt just to keep treading water."

Maria Minniti, a professor of entrepreneurship at Southern Methodist University's Cox School of Business, agrees. Companies in good financial situations are likely to benefit from increased access to credit under Obama's plans, particularly when combined with a market in which costs are down for human capital as well as commercial space. "This may be the time to upgrade your location or hire some fantastic talent," she says.

And would-be entrepreneurs with good credit scores might find this a good time to borrow some funds, she adds. "Small businesses, especially young ones, tend to operate on a tight budget, stretching earnings from year to year. If you've operated on a budget and you're holding some reserve, this may be the time to borrow and make improvements or expand." . . .

Demand for loans has dropped in 2009, according to the U.S. Treasury, perhaps because many companies are pulling back on spending or fear they wouldn't get a loan if they applied for one. But demand is likely to increase if banks feel more comfortable lending under the new government guarantees, says Minniti.

While she commended the Obama Administration for putting a spotlight on small business, she says she is wary of the idea that government—not the free market—may play a greater role in determining which companies get loans. "Economists like myself tend to believe that the market incentive structure does the best job of selecting and channeling financial flow to the right places," she says.

Minniti worries that with higher loan guarantees and government providing a secondary market for small business loans, bankers will be tempted to abandon their strict monitoring role in lending. "In spite of their best intentions, the government's attempts to monitor and implement these programs correctly will add to a huge bureaucracy." she says. "Will a large government plan do a better job than the market would? It's tricky to work that out."

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