Two of the most common complaints by small business owners are lack of demand, and lack of credit. The Fed hopes to solve the latter problem with TALF, which stands for the cleverly named Term Asset-Backed Securities Loan Facility. It is a program created last year, but for which details were scarce until yesterday, when the Fed relased more details about the program.
The program seeks to offer low interest loans to potential investors of AAA rated asset backed securities. Once a lender is able to package loans it has made into ABS’s, it moves those loans off its books and provides some cash to the lender, which in turn allows the lender to make more loans. This market freezed up during the credit crisis last year and hasn’t eased up much since then. The Fed is hoping that this will spur up to $1 trillion in new lending in the auto, consumer and small business sectors.
Some small businesses rely on loans to operate throughout the year, for various reasons. One reason is uneven revenue stream, with the bulk of revenue concentrated within short periouds throughout the year. Loans may allow such companies to continue operating even during periods where revenue is low or non-existent. The Fed is hoping to help such companies, and only time will tell if this is effective. But it it does, it will allow companies to focus on their other problem, demand.