Credit: Photo courtesy of Muñoz Group
The biggest problem facing small businesses today is a lack of credit, says George Muñoz, former Chief Financial Officer and Assistant Secretary of the United States Treasury Department under President Clinton. And tight credit is throttling job creation, Muñoz said, threatening a key aspect of the American Dream: jobs for anyone who is willing and able.
Munoz, who is also the former CEO of the Overseas Private Investment Corp. (OPIC) and now the principal of Muñoz Investment Banking Group, together with his co-authors Ed Crego, principal of CONSULT LTD., and Frank F. Islam, chairman/CEO of FI Investment Group, wrote “Renewing the American Dream: A Citizen’s Guide for Restoring Our Competitive Advantage,” (IMC Publishing, July 2010), which focuses, in part, on how small businesses can adapt to the changing world.
In an interview with BusinessNewsDaily, Muñoz discussed the challenges facing small businesses, his take on the President Obama’s small business legislation, and what needs happen to jump-start new business.
BusinessNewsDaily: What is the biggest challenge facing small businesses today?
George Muñoz : Credit. Banks used to make money from lending. Today lending money to small businesses is small-margin business. It’s expensive [for banks] to get to know customers and their businesses because it takes a lot of work. Instead, banks are making money from trading securities, lending to larger companies and so on. In the old days, a local banker would visit a customer’s plant and ask for a business plan . They were almost partners in helping small businesses grow. Today lenders don’t ask for business plans, they ask for asset lists. They want to know what assets you have to guarantee your loan.
BND: How is this affecting small businesses?
MUÑOZ: Small businesses are having a harder time adapting because they cannot borrow money for businesses that require experimentation, the development of new products or expansion into new markets because banks do not have the interest or personnel to evaluate those risks. The only way small business can work in new areas is to self-finance — by reinvesting profits. And small businesses don’t usually have large profit margins.
In the past, entrepreneurialism, sweat equity and innovation were recognized as legitimate reasons to lend to a business. Now, collateral is the only consideration. This shift didn’t take place because small business failed. The financing system shifted its emphasis away from investing in businesses. The skill set for evaluating which businesses are a good investment doesn’t exist any more. If you go to your local bank and ask for the loan officer, they’ll tell you they don’t have one at that location.
BND: Will President Obama’s proposed small business legislation help?
MUÑOZ: The jobs bill does not include incentives for banks to lend to the kinds of businesses that will create jobs. The money will be used for wrong reasons. Many small businesses now have lines of credit and loans that get renewed annually.
My guess is that the banks will call in those loans and make new ones with the $30 billion the small business legislation is making available. The bill should include stipulations that the money should be used for businesses that want to expand exporting, create jobs, contribute to rebuilding the economy. The small business act has good intentions. It’s just not tailored toward solving the problem of lack of jobs and growth.
BND: What’s the solution to the lending problem?
MUÑOZ: We have seen models for lending that work and we’ve instituted them in other parts of the world. Development banks take different criteria into consideration when deciding when to loan money to a business . They ask whether it’s good lending policy, whether the business will create jobs, whether it will harm the environment, whether it will support human and worker rights. Is it good for economic development? And, of course, whether the loan is commercially viable. In other words, will it make money?
BND: Why did you call your book “Renewing the American Dream?”
MUÑOZ: In this country it has traditionally been unacceptable to have a segment of the population that perpetually lives in poverty. That is because we haven’t tolerated it. This recession is not an ordinary dip in the economy that is occurring. The road we come back on is going to be very different. Right now there is a lot of appropriate concern that high unemployment is not acceptable. However the longer it lasts, the more people become resigned to fact that a certain segment of the population will stay unemployed. That is the way much of the rest of the world thinks, but that’s not the way Americans traditionally think.
BND: What can people do to help “Renew the American Dream?”
MUÑOZ: The American character is still very strong. But it needs to be expressed in ways that work. The country needs to be back in growth mode. Once the American dream stops, it will be very difficult to regenerate the enthusiasm and belief that is required for people to take the risks and be innovative. Every individual has the right to petition government when things aren’t going well. All of us need to be thinking of effective ways to do that.