Increasing small business lending

President Obama is scheduled to announce today a program to use $30 billion of TARP funds to increase small business lending (a proposal that the Administration has been floating for some time). According to the Wall Street Journal:

In a briefing Monday, senior administration officials who helped draw up the proposal say that under the program, Treasury would provides capital investments in a swath of the nation's 8,000 banks with assets under $10 billion, which do more than half of U.S. small-business lending.
Banks that increase lending to small businesses beyond 2009 levels would qualify for reduced dividends owed to Treasury on the capital investment. White House economists hope that feature will spur interest in the program among community banks that shunned the original TARP program because of restrictions on the capital and worries that they would be tarred by their competitors as "troubled."

Here is another suggestion they might want to consider to help small business lending: unlock the lending potential of intangible assets. As we have pointed out in a couple of Athena Alliance reports (Intangible Asset Monetization: The Promise and the Realityand Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance), intangible asset backed lending is growing, but still nascent, means of financing innovation. Currently, companies can raise money based on their physical and financial assets. Such assets can be easily bought and sold, borrowed against, and used to back other financial instruments. But explicitly using intangible assets, such as IP, to borrow funds is difficult. While firms specializing in intangible-based financing are springing up, there are a couple of actions the Administration could take to foster this type of small business lending:

SBA loans to fund innovation. Explicitly change Small Business Administration (SBA) underwriting to allow companies to use their IP as collateral on loans. SBA already allows funds to be used to buy intangibles as part of the acquisition of a company by a new owner. Allowing IP to be used as collateral will increase the amount of funds a high-tech company would qualify for.

Create an IP-back loan fund. Other nations have developed special programs to encourage IP-based finance. A similar program in the U.S. should be set up on a pilot bases. The program could be run by the SBA, to take advantage of their lending expertise. Technical support could be provided by the SBA's Office of Technology, which coordinated the Small Business Innovation Research (SBIR) program and the Commerce Department's National Institute of Standards and Technology (NIST), which runs the Technology Innovation Program along with other science and technology related activities. Such a direct lending program would be a step beyond SBA's current loan guarantee programs. Direct lending is necessary, however, to jump start the process. Once the process of utilizing IP as collateral was fully established, the program could be converted to a loan guarantee program.

As I have noted before, the financial products discussed in this report are some of the most basic financing mechanisms in business, unlike some of the exotic financial vehicles. The innovation is in recognizing the value of intangible assets for corporate finance. Have the SBA enter the market would help regularize the market and set underwriting standards. That would go a long way to making intangible assets a regular and explicit part of the financial system.