Access to capital, the ability to get a business loan, is one of the biggest challenges facing small businesses today. With that in mind, Advocates for Independent Business (AIB) has produced the Backgrounder on the Small Business Credit Crunch, which outlines several broad policy solutions, with a focus on strengthening and expanding community banks, increasing credit union business lending, and reorienting the Small Business Administration’s loan guarantee programs to once again cater to the needs of businesses that are truly small.
“Studies show locally owned businesses are a primary source of net new job creation, contribute to higher median household incomes, and increase social capital,” said AIBA coordinator Stacy Mitchell, senior researcher with the Institute for Local Self-Reliance (ILSR). “Yet independent businesses in many sectors are losing market share, while the number of new startups has steadily fallen over the last two decades. Insufficient capital is a key culprit driving these trends.”
A significant share of locally owned businesses is struggling to secure the financing they need to grow. In the 2014 Independent Business Survey — a survey conducted by the ILSR in partnership with AIB — found that 42 percent of local businesses that needed a loan in the previous two years had been unable to obtain one.
AIB reported that one consequence of this credit shortage is that many small businesses are either not adequately capitalized or have been forced to rely on high-cost alternatives to conventional bank loans, such as credit cards. Both scenarios make them far more vulnerable to failing.
Here are some of the key takeaways from the AIB paper:
About three-quarters of small business credit comes from traditional financial institutions. At the beginning of 2014, banks and credit unions had about $630 billion in small business loans on their books.
Since 2000, the volume of business lending per capita at banks has grown by 26 percent, but this expansion has entirely benefited large businesses. Small business loan volume at banks is down 14 percent and micro business loan volume (business loans under $100,000) is down 33 percent.
Local community banks provide a disproportionate share of small business loans. Indeed, it is their declining market share that is largely to blame for the constriction in small business lending. As they lose market share to big banks, there are fewer financial institutions focusing on small business lending and fewer resources devoted to it. The top four banks now control 43 percent of all banking assets, but account for only 16 percent of small business loans.
Credit unions have expanded their role in small business lending, from $14 billion in business loans 10 years ago to more than $44 billion today. However, only about one-third of credit unions currently participate in this market.
The U.S. Small Business Administration’s loan guarantee programs have historically played an important role in expanding credit to small businesses that don’t meet conventional lending requirements. However, over the last few years the SBA has reduced its support for very small businesses and shifted more of its loan guarantees to larger businesses. Since the mid-2000s, the number of business loans under $150,000 guaranteed by the SBA each year has fallen from about 80,000 to 24,000. Meanwhile, the SBA’s average loan size has more than doubled to $362,000.
Among the policy solutions provided in the Backgrounder, AIB recommends increasing the number and market share of community banks, as they provide the “bulk of small business loans but are shrinking in both number and market share.”
AIB also suggests allowing credit unions to make more small business loans. At present, current regulations limit business loans to no more than 12.5 percent of a credit union’s assets. Rather than lifting this cap, AIB favors exempting loans to businesses with fewer than 20 employees from the cap. This would then “ensure that new credit union lending benefits” small businesses.
And finally, AIB believes the Small Business Administration loan guarantee programs should return to the previous size cap of $2 million on 7(a) loans and adopt other reforms to ensure that federal loan guarantees provide more support to very small businesses.