Opinion: The recovery will be weak unless small businesses get the credit they need and deserve
If small businesses don’t recover from the coronavirus pandemic, neither will the rest of the economy.
Across America, in cities and towns, are creating auto repair shops, restaurants, mom and pop retailers, and small industrial businesses two thirds of all net new jobs. Additionally, the money people spend in these companies usually stays local and makes 44% of total economic activity.
Despite these statistics, however, most small businesses face one common challenge: access to low-cost capital. Ergo, President Joe Biden’s proposal for a new public option in his Build better Agenda: a small business direct lending program administered by the Small Business Administration.
Access to credit
Businesses big and small need capital to buy products, invest in technology, hire more people, and weather economic storms. But that’s where the similarities between large and small companies end.
We live in an era of monopoly in technology, agriculture, retail and finance. And cheap debt is only for them the most dominant companies. This cycle of amplification – in which the largest and richest companies have access to the cheapest credit – increases inequality terrifyingly. Tech giants like Apple AAPL,
borrow cheaply and buy back shares Boost stock prices. Private equity funds like Blackstone BX,
pay dividends to investors and bonuses to CEOs who use debt.
In other words, giant corporations and Wall Street firms can borrow cheaply – $ 11 trillion and more – and make more money from financial tech than from productive contributions to the economy.
And for small businesses? Banks deny more than 70% of small business loan applications. Since these companies are not generating hundreds of millions in revenue, they cannot go into the bond or stock markets and get cheap money.
Fewer local banks for small businesses
As a result, some small businesses are tapping into personal savings or home equity, a luxury unavailable to many BIPOC entrepreneurs who are curbed by racial and gender wealth inequalities. So they turn to credit cards or high yield fintech loans, which is the same as using payday loans to run a business.
How did we get here? In the past, banks were bound by law to their communities and therefore had to grant loans locally. Bank deregulation has changed that.
Over the past 40 years, deregulation has enabled a tsunami of banking megafusions and consolidations. Today there are fewer regional and municipal banks, and large parts of America lack a single bank.
And, as a recent study shows, these trends have cut the supply of credit in the communities, which has led to a decline in local business start-ups, as well as jobs and wages. In addition, larger banks have little incentive to write smaller business loans. That’s because they cost them the same as drawing big loans but getting lower profits.
And so, amid a global pandemic, recent survey data shows that 44% of small businesses have cash for less than three months. With the Delta variant raging and the pandemic far from over, small businesses will need capital to weather the storm.
This is how it would work
If Biden Build Back Better’s proposal is successful, the SBA could help small businesses right away by doing the following:
Loans direct to any small business with single-digit interest rates up to $ 150,000, and government contractors or small manufacturers could borrow up to $ 1 million.
The SBA would work with community development finance institutions committed to helping low-income and low-income communities to reach underserved borrowers. The CDFIs would process the loans and receive a fee, and the SBA would hold the loan and do the rest.
Create a seamless online loan portal so small businesses can apply and make a decision quickly.
Launch a pilot worker collaborative funding so employees can buy companies and put workers and communities first.
The SBA direct loan proposal, while not the zippy one, could fuel an equitable economic recovery by supporting the potential of existing businesses and aspiring entrepreneurs. While some see the SBA’s direct lending as a threat to banks, we see it as a gap filler. The SBA would do what large banks are no longer equipped for: support small businesses and create jobs.
In addition, the direct lending program could highlight the need for a national industrial bank to finance large enterprises in the national interest, for example in building a green economy. The program could also complement efforts to establish state and local public banks.
The White House put it best: President Biden’s Reconciliation Plan Lays the Foundation for American Small Businesses Dec.NS Century.
So, Congress, let’s do it.
Ameya Pawar is a fellow of the Open Society Foundations and the Economic Security Project. He also serves as senior advisor to the Academy Group and served two terms on the Chicago City Council. Terri Friedline is an Associate Professor of Social Work at the University of Michigan and the author of Banking on Revolution: Why Financial Technology Won’t Save a Broken System.