Addressing Complex Challenges In Small Business Access To Capital

Just before the Covid-19 epidemic, the Small Business Index from MetLife & the U.S. Chamber of Commerce hit an all-time high. American entrepreneurs and business owners mirrored the sentiments of the national economy which was experiencing strong growth, rising wages and low unemployment.

The pandemic crisis caused a severe blow to young and small businesses, forcing thousands of companies to close and threatening hundreds of thousands more. Covid-19 revealed the underlying problems in small business, as crises tend to do. Despite the giddy pre-pandemic days of glory, the crisis forced us into confronting large disparities in funding and discouraging trends which had been around for many years.

These include:

  • While there has been a rise in business creation among peoples of color over the years, exit rates for businesses owned by Black- or Hispanic-owned companies have been consistently higher over the past three years.
  • Over half (58%) of Black-owned small businesses were classified as “at risk or distressed” before the pandemic compared to 27% of white-owned firms.
  • Going into the crisis, Black- and Hispanic-owned small businesses had no more than two weeks’ worth of cash buffer.

Paycheck Protection Program (PPP), an emergency program designed to help small businesses survive and maintain their employment, was widely effective. Yet its structure, which was based on the Small Business Administration’s 7(a) loan guarantee program, reflected demographic differences in how small businesses access credit.

The Biggest Gap

Bipartisan Policy Center surveyed experts to find out how small businesses can finance their financing. It was broad question: What is the single action that the federal government should take in order to increase capital access? These were the responses

  • “Capital is simply not flowing to Black and Brown entrepreneurs … the public and private sectors are not united around basic priorities of how to finance small businesses, or a fundamental understanding of how barriers to access compound.” — Lauren Paul, director of partnership and policy, Common Future
  • “Our small business economy really is a story of two different economies. The economy of minority entrepreneurs makes up the other economy. In that case we see historically that minority-owned businesses are half as likely to get the credit that they need as their white business counterparts.” — Tom Sullivan, vice president of small business policy, U.S. Chamber of Commerce
  • “We need to expand the eligibility of federal dollars for capital deployment. … Policy should be expanded to have more capital providers eligible for dollars from the federal government that also can be levered in the community.” — Melissa Bradley, founder and managing partner, 1863 Ventures
  • “The smaller microloans tend to be used by underserved markets, minority-owned businesses, and sole proprietors.” — Ryan Metcalf, head of public policy and regulatory affairs, Funding Circle
  • “The number one impediment for low-income communities and people of color is the credit score.” — Nancy Santiago Negron, community impact lead, Ureeka

These comments reveal two themes. The first is that the greatest challenge to American entrepreneurial dynamism is demographic financing. To close them, we need fresh thinking about public policy.

SBA Programs and Financing Differences

There have been long-standing efforts to close these gaps. One of them is the 7(a) program itself, which was created to address perceived failures in the market for small business credit and is intended to assist those firms failing to find “credit elsewhere.”

Over the last ten years, however, credit provision under the 7(a), program has gradually shifted toward larger loans. In 2016, the average 7(a), loan size was only 9.9% higher than 2012 but there were 33% more 7(a), loans approved. Increased credit access is possible because there are more loans that can be guaranteed, without an increase in the average loan size. In fiscal year 2020, however, the number of approved 7(a) loans was 37% lower than in 2016—but the average loan size was 29% larger. Since 2015, the average loan amount has increased each year.

This is why it matters. This is because small businesses owned by Black and Hispanic entrepreneurs are more likely than others to require less financing. According to the Federal Reserve Banks’ Small Business Credit Survey:

  • When they apply for outside financing, one-quarter of Black and Hispanic-owned businesses request less than $25,000. This is compared to the 15% and 9% of Asian-owned companies.
  • More than half of Asian-owned small businesses seek external financing. They do so for more than $100,000. This is compared to 37% and 33% respectively for Black-owned and Hispanic-owned businesses.

SBA loan guarantees are intended to help address gaps in the market, but if they are steadily getting larger, they’re likely missing many small businesses who need credit the most.

Public Policy to Increase Capital Access

Washington has always supported small businesses with strong bipartisan support. The current Congress is not exception to this trend, despite the fact that there has been polarization on many issues. A new report by Goldman Sachs and BPC 10,000 Small Business VoicesThe 117th Congress included a list of pertinent bills. Although some may appear to suggest minor changes to existing programmes, others show an openness to taking bold and creative actions.

Accessing capital for small business is a complicated issue that intersects with other issues such as equity, regulation, and opportunity. Advocates and champions should outline a roadmap for policymakers in order to overcome current challenges and promote small business vibrancy. More information will be available in the column over the coming weeks.

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