Small business access to capital

The country’s biggest banks have taken a lot of criticism about small business lending since the great recession began. Obviously, they don’t agree with their critics.

In a recent interview with Robb Mandelbaum of The New York Times, Marc Bernstein, one of the top two small business lending executives at Wells Fargo addressed the issue of small-business owners feeling that big banks with bailouts have done nothing to help small businesses.

A lot of people who frankly are not very good credit risks and who want a loan, I can understand their frustration. But Wells Fargo has been committed to small-business lending for a quite a while now, and we know here that we don’t help our customers, our communities or shareholders by declining a good loan.

What Mr. Bernstein doesn’t say is that the “not very good credit risks” of today were acceptable loans before the recession.

This Thursday I will be in a meeting at the White House organized by the American Sustainable Business Council. In preparation for the meeting with numerous Administration economic development officials, I was asked to develop a background piece with recommendations for addressing access to capital by small businesses. Check it out below.

I’ll let you know how the meeting goes.

Small Business Access to Capital

In early May, Small Business Administration Administrator Karen Mills spoke to the Greater Miami Chamber of Commerce. She had good news for many businesses seeking credit. “Lending is back to 2008 levels,” Mills said.

But the news wasn’t so good for the small businesses in geographically challenged areas and our smallest of small businesses. According to Mills, “we are not back in underserved communities and we are not back when it comes to small loans.”

The truth is that lending hasn’t been good in underserved communities and for our very small businesses for a very long, long time.

The demand for small business loans is picking up. For those with between one and 10 million dollars of revenue, Greenwich Associates has found that small businesses increased their seeking of loans in the first quarter of this year by 100 percent over the previous quarter. According to Greenwich, on average about 60% of the small businesses they surveyed received the credit they sought between March 2010 and March 2011. And the majority of these loans came from smaller, community banks. Unfortunately no one is measuring demand for loans and loans made to our microenterprises (businesses with fewer than 5 employees and capitalized with less than $35,000).

Late last year, with the support of ASBC, Congress passed the Small Business Jobs Act which included a $30 billion lending fund to encourage community banks to make small business loans. Unfortunately comparatively few eligible community banks have indicated that they want to participate in this program.

The reason given by some banks is that there is little loan demand from small businesses. That’s simply not true. The demand is there. More likely the answer lies in federal regulator pressure on community banks to avoid “risky” loans, the same small business loans that were more acceptable prior to the great recession.

There are some possible solutions to this lending dilemma for small business if community banks refuse the allure of the Small Business Lending Fund and big financial institutions still are only interested in the cream of small business loans.

1. Put credit unions more in the lending game by raising the cap on their lending ability.

2. Dramatically (!!!) increase funding for small business loans under the USDA, CDFI and SBA (microloans) programs. In addition to lending resources the non-profits using these funds also need a big boost in funding for technical assistance to help guarantee the success of the loans.

3. Allow the SBA to bypass the financial institutions and start making loans directly to small businesses. The federal government now makes direct loans to students through Stafford and other student loans. The SBA already can make direct business loans on its own in some cases.

4. Create a new capital-raising strategy for small business such as “crowdfunding”. The Security Exchange Commission is reviewing a proposal to allow small businesses and microenterprises to solicit investments of $100 or less while avoiding much of today’s regulations.

If the traditional financial institutions will not provide the capital access small business and microbusinesses need and credit unions cannot make up the difference between demand and access, then we should empower non-profit organizations to take on more of the lending responsibility, make direct government loans as we did in our automotive sector and dramatically reduce the regulatory burden on small investment strategies.

It is time to make significant changes to our country’s small business lending and financing system. Conventional practices are not generating the small business access to capital our economy desperately needs to grow