In the USA's current path to economic recovery, small business loan applications are still being rejected by the banks. Now what?
The economy is continuing on a path of recovery from the aftermath of the recession. While this should signal good times ahead for our nation’s small businesses, entrepreneurs are still struggling to get what they need most to grow and thrive: access to traditional loans and more reasonable terms on alternative lending.
This problem was addressed head-on during the recent Small Business Leadership Summit—an event that brought more than 100 small business owners from around the country to D.C. to speak directly to policymakers, issue experts and senior members of the Administration about the top issues facing small businesses.
We noticed a common theme from our small business attendees during the Summit—regardless of industry sector, location or business size, small business owners across the country are struggling to gain access to traditional lending, and many have faced issues surrounding new opportunities in the alternative lending space.
Discussions like those held during the Summit are important; while small business confidence is on the rise and entrepreneurs are ready to expand their businesses, very few are getting the credit they need to do so.
It’s no secret that access to capital has been a persistent problem for entrepreneurs, particularly since the recession. But according to the Federal Reserve Bank of Cleveland, lending for big businesses reached record levels last year, while small business lending still hasn't caught up with pre-recession levels.
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Credit Unavailable for Small Businesses
What’s more, Small Business Majority’s opinion polling shows an overwhelming 90 percent of small business owners nationwide agree the availability of credit for small businesses is a problem, and more than six out of 10 business ownders agree it’s harder to get a loan now than it was in 2008. It’s been especially difficult for women and minority entrepreneurs, and small businesses in underserved areas.
Entrepreneurs need capital now more than ever as they are recovering from the recession and growing their businesses, but most can’t seem to catch a break from local and big banks alike.
That’s because many traditional lenders see startups as risky ventures, or they don’t offer loans that meet the needs of small businesses.
Pam Gueldner, co-owner of Manndible Cafe
So, Who Does Qualify?
Pam Gueldner, co-owner of Manndible Cafe in Ithaca, New York, knows firsthand how difficult it can be to get the capital needed to start or grow a business.
“I started my first business in 1995, and we were owner-financed because we couldn’t get the credit we needed at that point,” said Gueldner.
Gueldner was able to pay off that initial investment and has gone on to open other restaurants since then. She’s now the co-owner of a successful café in Cornell University’s Albert R. Mann Library. But she still hasn’t been able to get a loan when she needs it.
“Recently, we were trying to get a loan to do some renovations at Manndible Cafe. Even though we have been running a successful business for five years with 45 employees, we still can’t get a loan to help with the cost of renovations due to some past financial difficulties and a lack of collateral.”
Gueldner also cites their lack of credit history with banks as a problem with getting a loan now, bringing her struggles to gain access to capital full circle.
Stories like this are unfortunately all too common in the small business community, and many entrepreneurs simply can’t get the credit they need to start or grow their businesses.
Related Whitepaper: No Thanks, Banks: Alternatives to Small Business Loans
Alternative Sources of Lending
In the absence of traditional bank loans, many small business owners are turning to alternative sources of lending. While these options can help open up opportunities for short-term loans and cash advances, this new breed of lending brings with it its own set of problems—unscrupulous actors who would take advantage of small business owners solely to pad their own pocketbooks.
The development of online lending and alternative financing options hold the potential to get needed capital to entrepreneurs and to communities that have long been under-served, but it needs to be done fairly and responsibly. Many small business owners report problems with extremely high interest rates and unclear loan terms, underscoring the need for more transparency and oversight in the alternative lending space.
Donation-based crowdfunding sites like Kickstarter and Indiegogo are in full swing and have earned media attention. Equity crowdfunding sites, which allow high-net-worth accredited individuals to invest directly in private companies online, also hold significant promise as a source of capital for small businesses.
Related Article: To Borrow or Beg: Small Business Funding in 2015
The JOBS Act of 2012 set the stage to open up equity crowdfunding to the average American who wants to invest in startups or small businesses, also called non-accredited investors. However, it also ignited a debate about responsible investing and rules have yet to be written. In the absence of federal rules, some states are opening up equity investing to non-accredited investors so those interested in this type of investing have the opportunity to make small investments in privately-held businesses in their state over the Internet.
Many crowdfunding sites face regulatory and policy hurdles before becoming accessible to the average American as an investment tool, and therefore, a significant source of small business capital.
What Can Be Done
Policymakers should take note and consider regulations that will protect small business owners from being taken advantage of, but it’s equally important that regulations don’t become so stringent that they stifle innovation. There should also be more options in the traditional lending space for small businesses, particularly for women and minorities and those in under-served areas.
Small business owners are our biggest job creators. And like all businesses, they need credit in order to expand their ventures or turn their business ideas into a reality. It’s time to take steps to protect small businesses from unscrupulous lenders while getting them the capital they need to grow and succeed.