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Will Microloans Help Small Business Create Jobs?

by Robert Wagner on February 23, 2010

The President has championed opening doors for small businesses, with job creation being the highest priority. For many owners,  access to capital is a challenge. Small businesses find themselves in need of loans to cover their routine operating cost. Would free up working capital encourage companies to hiring new employees and expand payroll?

One solution is the SBA (Small Business Administration) Microloan program. It’s designed to offer businesses working capital and is intended to be a short-term loan (up to 6 years depending on the loan size). Although the average loan amount is $13,000 the cap is currently $35,000. Small business can use the credit for a variety of needs including supplies, equipment, and most significantly, making payroll. Business owners who need smaller loan amounts to grow can now contemplate the Microloan as a viable option.

Small business employs most of America’s workforce and constitutes the highest priority opportunity for job creation. Governor Patrick of Massachusetts had this to say about small firms, “Small businesses account for 85 percent of Massachusetts businesses… ” said “If we want new jobs, we need to focus particular attention on meeting the needs of small businesses. That means addressing their need for access to working capital…” Read more on the Governor’s website.

A few would say that even if small businesses have access to capital, it will not stimulate job creation. Sen. Ben Nelson (D-Neb.) states, “If I don’t have enough customers for my product, hiring more people is not going to help…”.  Cary Leahey, senior managing director at Decision Economics Inc., said in an interview with Bloomberg.com, “Will you have a sustainable recovery a few years down the road without getting some small-business spending?  No”.  If owners sense that the economy is stabilizing, hey may invest in growth activities such as procuring more goods and services from other small businesses.

Increasing the available capital for small business could help generate demand.  Sen. Sherrod Brown (D-Ohio) had this to say in The Hill “I think there would be an increase in demand if we could unfreeze credit.”

Consider what could happen if Microloans where made readily available:

  • Businesses could free up working capital and increase investments in goods and services.
  • Other businesses will likely do the same in order to stay competitive.
  • Given economic conditions the past few years, owners will feel more comfortable with smaller loan amounts and shorter terms.
  • Businesses will hire to keep up with demand.

The White House has also suggested raising the cap on the Microloan to $50,000. This could also increase the demand for the loan program and open the Microloan’s reach to include businesses that need larger amounts of funds.

Consequently, small businesses can use the SBA Microloan to acquire working capital to facilitate hiring.

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