The blueprints are finished, the construction contractors are lined up and ready to go, and a number of customers have signed a lease, waiting to move in.
There’s just one problem – the bank won’t loan the money.
Without the money, contractors and construction workers don’t get paid, buildings don’t get built, tenets don’t move in, new businesses don’t get started, and existing businesses can’t expand. The much talked about “credit crunch” is already suffocating small businesses across the country, especially construction companies and their employees, where one in four workers are unemployed. That’s a staggering 21 percent more than twice the national average.
The problem is that massive debt is soaking up available credit, making banks skittish about loaning money. My own bank, which I’ve done business with for years, is now imposing significant restrictions on how loans must be secured.
In the past, my firm often got capital from banks when we had commitments from just 10 percent of the occupants of a new building. Recently, my bank denied a loan for a project, even though we had commitments to lease 50 percent of the space before we broke ground.
The Senate now has 60 votes in support of legislation that would create yet another unnecessary layer of bureaucracy between small businesses and the capital they need to grow. Proposed as the Bureau of Consumer Financial Protection, yet another government agency will have the power to snarl small businesses in webs of red tape. The most immediate effect will be to increase the costs and the time involved in obtaining a loan. Both spell disaster for small business owners and the employees and workers who depend on them to put food on the table.
Data from the recession in the 1990s showed that small businesses are the only sector of the economy that produce jobs coming out of an economic downturn. The near freeze on lending has created a situation where virtually all economic recovery has been driven by government projects that are only temporary. To sustain economic growth, small businesses must have access to capital to fund private sector projects.
Economists have projected that the creation of this new government agency will raise the cost of obtaining capital by 160 basis points. That means a 6 percent interest rate on a loan becomes a 7.6 percent rate, which translates to higher repayment terms, and less money that can be spent on paying workers. In fact, in an analysis of the bill, entitled The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit, economists projected 2.1 percent less borrowing, which means fewer projects would get started in the first place. And fewer projects means fewer jobs – net new jobs created would be 4.3 percent lower.
Without a doubt, there were a number of financial problems that, prior to the economic challenges of 2008, federal regulators were not adequately addressing. But this bill creates another layer of bureaucracy that is disruptive to the economy and the creation of new jobs.
The workers are lined up; the trucks and machines are ready to move; and the materials are just waiting to be delivered. We don’t need another layer of bureaucracy to fix our economy, we need government to get out of our way.
Jim Elmer is the 2010 National Chairman of the Associated Builders and Contractors. He is president of the James W. Elmer Construction Company in Spokane, Washington.