Main Street and Wall Street are Not on the Same Street
A different approach to small business lending
I couldn’t agree more with what Charles Green published today on the Coleman Report. Wall Street might be “roaring back to life,” but Main Street is seeing modest growth and, depending on the survey you read, lackluster to negative job growth.
When, according to former SBA director Karen Mills, 70 percent of job growth takes place in this sector, more than Wall Street, more than big business, small businesses needs to be running at 100 percent to create jobs and grow the economy. Unfortunately, there are those who should know better don’t seem to get it. A couple months back, booth Green and I wrote about some pretty inflammatory rhetoric shared by Ray Hennessey at Entrepreneur.com. Of course this is old news now, but the sentiment is still alive and well when I talk about the SBA and their roll in the small business lending infrastructure.
Granted the $30 million or so in loan guarantees provided by the SBA ever year is only a small percentage of the capital available to small business owners, but they do set a tone and establish a benchmark. I’m very pleased with acting Administrator Hulit’s initiative to remove fees on 7(a) loans of $150,000 or less. In my opinion, this is a great step in the right direction to help the local dry cleaners, restaurants, and other Main Street business owners looking for the smaller loan amounts we often see business owners looking for here at Lendio.
Hennessey argues that there is more than enough venture capital and private equity to fuel growth in small business, but I disagree. Some businesses just aren’t attractive to an equity investor regardless of how healthy and profitable they are. For example, it’s very unlikely the people who wash and press my shirts would have much success should they present their business plan to the Sharks on the Shark Tank. The business model just isn’t scalable enough to create the returns a venture fund or angel is looking for. Let’s face it, most small businesses grow on borrowed capital.
According to the Federal Reserve Bank in Cleveland, credit eased a bit for small business owners over 2013 but not at the same rate as it did for bigger businesses. And, a recent survey conducted by the NFIB suggests that small business owners are upbeat…sort of. About half of those surveyed are hiring and less than half (32 percent) say their credit needs are being met. Saying it’s better than the previous year might make us all feel better, but in reality, stagnant or non-existent job growth in small business equates to stagnant or non-existent job growth in the country overall.
Many people (Hennessey included) spend far too much time thinking about big business and Wall Street and forget the value of Main Street. Green called Hennessey an “ideological bully” as he called for the SBA to be abolished. I agree.
If there’s a problem with small business lending, it’s the definition of what we call small business. I’ve spent my career (the last 30+ years) in small business. I’ve worked in a Main Street business with fewer than five employees, along with a software company with almost $30 million in revenues and more than 250 employees, and the venture-backed startup where I work now. They are all categorized as “small business” but have very different capitalization needs.
While things on Wall Street might be looking up, I think we need to keep our eye on the ball. Making capital available for Main Street benefits everyone—including big business and Wall Street. Hennessey argued that big business doesn’t need the SBA. He’s right. The SBA wasn’t intended to help big business.
That being said, the SBA isn’t the only answer to the financing needs of small business. We need to encourage community bankers to be more engaged in their communities, welcome alternative lenders who are filling an important gap left by traditional lenders over the last few years, and do a better job of educating small business owners regarding how important it is to protect their credit rating and better prepare for their first chat with a lender.
A friend and colleague recently said, “It’s not the lenders job to help a small business owner fix a bad credit score.”
Although that is true and the way things are now, maybe it should be our job to help small business borrowers put their best foot forward—and even teach the skills to help them improve their current standing with a lender. Anything we can do to help small business owners access capital has the potential to ramp up job growth and spur growth within local communities—even if that means a little extra hand-holding through the borrowing process. There are lenders finding success with this approach now. Maybe we should all be taking this approach.
I’d love to hear from successful small business lenders and what they’re doing to help their small business owner customers.