Paying lip service to small businesses is a bipartisan pastime. Yet something has gone awry: A major reason for the anemic recovery is that since 2009 the average pace of new business formation has fallen to its lowest level in at least 22 years, Bureau of Labor Statistics data show.
If politicians really want to help out small businesses, here’s a great place to start: Reform the direction and practices of the Small Business Administration, the federal government’s agency for offering capital and counseling to startups and mom-and-pop shops.
In the 1980s, small businesses, firms with fewer than 100 employees, generated 58% of net new jobs, according to the Census Bureau. That figure slipped to 49% in the 1990s. Today only 31% of net job growth comes from small businesses. Although headlines rave about high-tech entrepreneurs, startups created only about 2.8 million jobs a year during the recovery, down from 3.6 million in 2006.
Meanwhile, the Small Business Administration has deviated from its core mission. Half as many small businesses (45,730) receive loans from the agency’s 7(a) loan-guaranty programs today as did before the recession. These loans support only two-thirds as many jobs (503,853) as they did in 2007, according to SBA’s Annual Performance Reporting. Despite its mission to support small businesses, nearly a third of the annual lending authority goes toward loans over $2 million. Recent efforts to eliminate fees on smaller loans help, but they’re not enough.
The agency has also made it more difficult for smaller banks to participate in its loan-guarantee programs. A burdensome 528 pages of regulations govern the loans. The SBA regularly releases new policy notices, 13 last year, that further complicate these rules. The results have been predictable: a 13% reduction in bank participation since 2012. That’s 324 fewer banks willing to provide small-business loans through the SBA loan programs. This has led to a shift toward nonbank lenders, which aren’t as regulated, to meet small-dollar credit needs. Working through web portals that promise speedy turnarounds, these institutions now provide more small-business loans than ever. Nonbank financing to small businesses has doubled every year since the mid-2000s, the Federal Reserve estimates.
Yet not all forms of financing are created equal. The biggest and most important advantage of traditional banks is that they can provide lasting hands-on support. Virtual lenders outside the community use algorithms to turn real-world entrepreneurs into online profiles. But an app will never fully understand a local business the way a person from the same town does.
Community banks understand the volatility that debt introduces to the city or town, but also the economic prosperity it can nurture when deployed prudently. Credit well-extended helps create viable small businesses, which means new jobs, filled by people who buy homes and cars, shop for groceries and clothing, go to movies and museums, pay taxes and give to charities.
If political leaders are serious about fueling economic growth, then they should do more than praise small business. Putting the SBA’s focus back where it belongs and expanding lending through community banks would be an extremely effective start.