Small businesses need access to capital to be able to recover
October employment report posted another gain of 661,000 jobs in September and the unemployment rate fell to 7.9%. However, the increase has not been as strong as expected and the economy is still far from having reached its full strength, only almost half of the jobs lost in March and April have returned, with city centers bear the brunt of the losses. Small businesses are the biggest job creators and if they don’t pick up, neither will the economy. To recover, small businesses need capital, and better regulation can help them get the capital they need to thrive again.
Small businesses are an important part of the economy. Before Covid-19, companies with less than 500 employees accounted for nearly half of all jobs and 44% of GDP. Now small businesses are struggling. Investigation found that at the start of the pandemic, 45% of small businesses temporarily closed. The same survey found that small businesses are often short on cash: most had less than two months of expenses set aside for an emergency.
In normal times, it’s not easy for small businesses to get financing, and the pandemic has only made it harder. In 2019, before the pandemic, 43% of small businesses applied for funding, but only half got all the money they asked for while the rest got only some or none at all. the Federal Reserve. Small Business Credit Survey.
The federal government created the Payment Protection Program (PPP) to improve small businesses’ access to capital during the pandemic, but the results have been modest. The program was popular initially, going through $350 billion in two weeks. Demand for the second round of PPP loans has been weaker and some funds are still available. As for the results, the loans have helped some small businesses, but many did not have the money they needed and the overall effect of the program on employment was small.
Although the PPP has been a resounding success, it is only a temporary emergency program, not a long-term solution to improving small businesses’ access to capital. What small businesses need is better regulation that allows for more private sector innovation in lending, not more government programs.
Traditional banks are the main source of financing for small businesses, but they are not the only source. Many small businesses rely on personal savings, friends or family members, and more recently fintech companies and online lenders such as Lending Club and Kabbage. According to the most recent Small Business Credit Survey, online lenders were the third most popular source of financing for small businesses over the past five years, after banks and friends or family.
Although traditional banks are still a popular source of funding, they are no longer as dominant as they once were. From 1995 to 2016, bank loans to small businesses as a percentage of total bank loans fell 40% at 21%. Meanwhile, reliance on fintech companies is exploding: the share of total loans involving non-bank fintech lenders has increased 5% in 2013 to 38% in 2018.
Fintech loans would be even more popular if it weren’t for bad regulation. Traditional national banks and FDIC-insured state-chartered banks can lend nationwide depending on the laws of their home state. Fintech companies, however, must obtain lending licenses or money transfer licenses for each state in which they operate. This puts Fintech companies at a competitive disadvantage and like Brian Knight of the Mercatus Center at George Mason University Remarks “This heavy and unequal regulation is unjustified and can lead to higher costs, reduced service, competitive inequalities and even political inequalities.”
State banking regulators have taken steps to ease the burden of state regulation on fintech companies, but there is little they can do. Congress is in the best position to level the playing field between traditional banks and fintech companies by establishing clear and consistent rules for fintech companies to follow that allow them to better compete with banks when operating online. across state borders.
Small community banks are big lenders to local businesses, but they disappeared over the past 20 years, in part because of the high costs of complying with more and more regulations. Fewer banks means fewer new businesses: A recent study the use of Swedish data shows that proximity to a bank is important for the creation of new businesses. When community banks close, nearby small business closures often follow, and new businesses are less likely to replace them.
Congress and federal regulators could reverse this trend by modifying regulations and penalties which increase the costs of small banks and deter them from lending to small businesses, such as flood insurance requirements and other loan disclosure rules.
Policymakers play an important role in determining small businesses’ access to capital, but they are not the only ones who can help. Organizations such as Capital of the Rising Tide in New Jersey, partner of the Stand Together Foundation*, offer a range of programs and services to budding and established entrepreneurs. rising tide Capital credit helps entrepreneurs navigate the loan market, including non-banking options like equity lending and private investment. Its other offerings include free legal services, business competitions and networking opportunities.
Covid-19 is disrupting the country’s economy. Many small businesses are closing while others are experiencing demand surges. A strong economic recovery requires providing capital to businesses that need it, but right now small business lending faces too many hurdles. Better regulation will create a more resilient and efficient financial system that will allow small businesses to get the financing they need to fuel economic recovery.
*The Charles Koch Institute is a sister organization to the Stand Together Foundation, both members of the Stand Together philanthropic community.