The National Federation of Independent Businesses released its Optimism Index for November on Tuesday. After going through it several times, I feel like it’s a mixed bag. Small business optimism is up slightly — basically, it’s up but nothing to write home about.
“The year is not ending on a high note in the small-business sector of the economy. The ‘bifurcation’ continues with the stock market hitting record high levels, but the small-business sector showing little growth beyond that driven by population growth,” said NFIB chief economist Bill Dunkelberg.
Ho-hum job growth is one of the highlights of the report. Yes, we’re doing better in that department than last year at this time, but I’m not sure that’s saying very much. The connection between job growth and access to capital is of interest to me, and I’m not sure the news in that department is any great shakes either. Only 32 percent of the NFIB members surveyed said they were getting the financing they needed — and I think it’s safe to assume that the NFIB probably represents the more established and mature of the almost 30 million small businesses in the United States.
Small business grows on borrowed capital.
Although I think 32 percent is bad, I regularly hear the number is more like 10 percent. Which is probably indicative of the state of younger, less established companies along with their more mature small business siblings.
Overall, small business lending remains down and most bankers and other financial pundits suggest the lack of demand can be traced to the creditworthiness of borrowers, increased regulatory scrutiny on banks and consolidation within the banking industry. Earlier this month, Rep. Sam Graves, chairman of the House Committee on Small Business, published a press release stating, among other things, that according to the Federal Deposit and Insurance Corporation, “…the number of banking institutions in the U.S. has fallen to its lowest level since at least the Great Depression, and many of the smallest banks have merged or closed.”
In a nutshell, bankers suggest, there are fewer banks, regulation makes it difficult to make comparatively risky small business loans and small business borrowers have bad credit. Although, I do believe these factors are part of the problem, I think it’s painting with a pretty broad brush.
After writing about this a few days ago, I’ve been asked, “What would you do about it?”
A good question. This morning I found in my inbox a piece written by Charles Green for the Coleman Report newsletter. For the most part, I think we pretty much agree. He lists a few more things than I do, but many of them can be put in similar categories.
The SBA needs to emphasize smaller loans: Green and I agree. In 2012, the average SBA 7(a) loan, its most popular and widely used loan product, was roughly $337,000. In 2013, it was almost $380,000. Most of the Main Street business owners you and I can relate to aren’t looking for loan amounts that look anything like that. At Lendio, 59 percent of the people who come to our site looking for a loan are asking for $50,000 or less. To the local dry cleaner or restaurant, that’s a lot of money. Most of the alternative lenders I speak with do much bigger loans, but they universally say their bread-and-butter small business loans are in the $25,000 to $50,000 range — often even $10,000 or $15,000.
Granted, the SBA loan guarantee program is not the biggest source of capital for small business owners, but they set a tone that trickles down to its member banks. This is also impacted by regulation, another area in which Green and I agree. As long as it costs relatively the same amount to underwrite a $50,000 loan as it does to underwrite a $500,000 loan, who can blame a banker who goes after the bigger fish?
In the beginning of October, the SBA eliminated fees on loans of $150,000 or less, which is a good first step in the right direction, but I don’t think it’s enough. We need to relax the regulatory burden associated with what the SBA would call micro-loans. I’m not suggesting we throw caution to the wind (nobody wants to revisit the savings and loan scandal), but we do need to encourage community bankers to take their place in the small business ecosystem.
Green suggests allowing credit unions to participate at a higher level in the small business lending market. All my community banker friends now want to hang me up by my toenails, but anything that provides more capital availability is a good idea in my opinion.
Small business owners need to take some responsibility: The last few years have been tough for anyone in small business, and the primary metric loan officers have to judge small business borrowers is their credit score. A young company with no credit and an owner with bad credit doesn’t have many options.
Universally, all the lenders I talk to want the small business owners they work with to give them a reason to look beyond their credit scores. They want to see well-reasoned business plans including a risk mitigation plan should things not go as planned. I’m surprised to hear there are so many small business owners who can’t articulate what they are going to do with the proceeds of a loan, let alone how they plan to repay it. Green suggests, “A Wells Fargo/Gallup survey found that 13 percent of small business owners in 2007 thought credit would be harder to get in the next 12 months; by 2013, that number jumped to 36 percent.”
Within that type of lending environment, small business owners need to do more than blame the lender, the SBA or the federal government. My small business friends now want to hang me up by the toenails.
In addition to where we agree, Green mentioned something I have felt for a long time, but hadn’t articulated: “End the uncertainty that’s dampening demand for loans.”
A lot of uncertainty exists for small business owners these days. They all are uncomfortable with the uncertainty of tax rates, health care costs or other regulatory burdens. And the “gentlemen” in Washington are doing nothing to ease their minds. The constant partisan bickering does nothing but make everyone uncomfortable. I’ve been around long enough to know that the sky is not falling; both parties need to sit across the table from each other, end the rabid partisanship and get something done. Yes, that means there will be some compromising, but that’s what the Founding Fathers wanted to happen.
So even though this part of Green’s list didn’t make mine, I agree with him.
When two out of every three new private sector jobs are created in small businesses, and those businesses grow and hire with borrowed capital, we need to do something to make capital more available, and I’m convinced this is a good start.
A Main Street business evangelist and marketing veteran with 25 years in the trenches, Ty Kiisel writes about small business finance issues for lendio.com and is author of the book, "Getting a Business Loan: Financing Your Main Street Business."