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Governor’s Office unsure about $18M small business lending initiative

Arizona may be eligible to receive an $18.2 million federal grant to provide credit to small businesses, but the Governor’s Office has yet to determine whether Arizona will seek the grant and some business representatives have cautioned that the money would have little effect.

The grant program, call the State Small Business Credit Initiative, was part of the Small Business Jobs Act signed into law by President Obama Sept. 27.

According to the U.S. Treasury Department, the grant awards are expected to provide a 10-to-1 return on the government’s investment, or roughly $182 million in increased small-business lending in Arizona.

Matt Anderson, a spokesman for the Treasury Department, said state governors will be responsible for coming up with a plan to distribute the money, which would then have to be submitted for federal review.

Governor’s Office spokesman Paul Senseman said it’s too early to determine whether Arizona will seek the grant because the U.S. Treasury Department has not given any clear guidance on how to participate in the program or what the agreement would require from the state. He said he expects more details in the coming weeks.

“The governor always has us look carefully at the ramifications of programs such as this, so she can see if it’s good for the state and then make the final decision about it,” Senseman said. “But we haven’t gotten any guidance on this yet.”

Nolberto Machiche, who represents the Arizona Department of Commerce, said the department will take direction from Brewer. If she wants to participate, the department’s staff will step in to assist in any way necessary, he said.

Three specific ways states could use the money were outlined in the Treasury Department’s press release to announce the grant availability.

In one of three suggested models, the grant money would reinforce the collateral that small businesses borrow against, which the Treasury Department noted will give banks greater confidence to extend credit.

The second model requires involvement of the public-private lending partnerships that grant applicants are required to have. The grant money, in this case, would be added to the contributions that states provide to banks to protect the institutions when loans go bad.

The final model allows states to add the grant money to government-run loan-guarantee programs, thereby increasing the confidence of lenders to extend credit to small businesses.

But small business representatives in Arizona say the federal program fails to address more urgent challenges that business owners face.

Farrell Quinlan, a spokesman for the National Federation of Independent Business’ Arizona office, said the program falls short of addressing core economic problems.

“This will have far too small an impact, considering the expiration of the Bush tax rates and the cost increases involved in the (recently passed federal health care reform bill) and the other programs passed by Congress and signed by President Obama over the past two years,” Quinlan said. “Those are the currents driving the economy, and they will sweep away any of the pebbles the administration may throw into them.”

Quinlan said a better way to stimulate small business growth would be extending the Bush tax cuts, and leaving government bureaucracy out of spending projects. He said studies have shown business owners will be reluctant to borrow until they start seeing more customers.

Todd Sanders, CEO of the Greater Phoenix Chamber of Commerce, said any increase in small business lending is welcome and will provide support for ailing businesses. Still, he said, credit access is a lesser problem than tax rate volatility or revenue stability.

Lee McPheters, who teaches economics at Arizona State University, said the grant program is a helpful step, but he agrees with critics who argue that lending is not the most pressing issue for an economic recovery.

“Certainly something is better than nothing,” McPheters said. “But the No. 1 problem affecting an economy in a recession or in the aftermath of the recession is the insufficiencies in demand.”

McPheters said demand likely will recover in the next two to three years as consumers regain confidence in the economy.

“If we had a magic wand, we would wave it in such a way that we would create certainty,” he said. “Unfortunately, we don’t have that sort of magic wand.”

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