Small Business Financing and Job Growth: Throwing Spaghetti Against the Wall
Small Business Financing and Job Creation
I’m not sure everyone gets the connection between small business access to capital and job growth.
Politicians love to talk about it, bankers love to tell us what they’re doing about it, but according to the Small Business Optimism Index issued today by the National Federation of Independent Businesses (NFIB), we’re not doing a very good job. Only 32 percent of respondents to the survey said their credit needs were met last month—about par with the rest of the year. And, I’d guess NFIB members likely represent the most mature, most stable, and some of the biggest small businesses. The numbers are worse for the smallest small business owners.
I must admit, I’m sometimes surprised at who doesn’t get it. A couple of months back, Ray Hennessey, editorial director for Entrepreneur.com, suggested, “It’s high time to eliminate the SBA altogether.”
Although I likely agree with all of your reading this blog, the SBA loan guarantee program is not the biggest source of small business financing, I do think they set a tone. At least for traditional lenders like banks and credit unions.
Hennessey suggests, “The SBA’s loan programs are designed to fund businesses that can’t find funding elsewhere.” Suggesting private equity and venture firms raise billions of dollars to fund the good ideas.
When you spend your day talking to sexy tech companies and bigger businesses, it’s easy to forget the lions share (70 percent) of people are employed and two out of every three private sector jobs are created in smaller small businesses. What’s more, the fact that venture firms and angels aren’t interested in Main Street doesn’t make them bad ideas or bad businesses. Especially when you consider the number of jobs they create.
In October the SBA eliminated fees on loans of $150,000 or less. I think this is a good move and hopefully encourages participating banks to take another look at some of the smallest small businesses. The alternative lenders I regularly speak with are geared up to offer loans of $10,000, $25,000, or $50,000—or even more—while the average SBA loan was $237,000 for 2012 and closer to $280,000 for 2013. Well above the threshold most Main Street business owners are looking for. We recently took a sample of about 10,000 of the small business owners who visit Lendio and 59 percent were looking for $50,000 or less.
It appears the problem isn’t that they want too much, but that they don’t want enough (at least as far as traditional lending is concerned).
As more and more alternative lenders enter the small business financing marketplace, I have to wonder if banks run the risk of becoming irrelevant so far as small business is concerned. A little over a year ago I read of a large bank in Oklahoma and a very large alternative lender that merged, making them a stronger player in the small business financing and services market. As we witness first hand the decline of community banks all across the country, I can’t help but wonder if the best-capitalized alternative lenders will start offering other small business banking services to compete with banks and credit unions at an even higher level.
I understand that small business lending is risky when only half of the businesses that start today are going to still be in business tomorrow. Nevertheless, the more spaghetti we can throw against the wall, the more jobs we’ll likely create.
I agree that there are some problems with small business financing in general and the SBA in particular, but when Hennessey suggests, “Perhaps there was a time when the SBA served a purpose for business. With abundant capital, better private-sector options and more worthy budget priorities for government, now is no longer that time,” I have to disagree.
I’d enjoy hearing your take on the state of small business financing. Are traditional lending sources like banks and credit unions becoming irrelevant? Do you see community banks evolving into something that looks more like an alternative lender? Or will alternative lenders start offering some of the services traditionally offered by community banks?