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State of Small Business Access to Capital

on June 27, 2011 Source: Policy Dialogue on Entrepreneurship

PDE staff were on hand for a House Committee on Small Business hearing on Capitol Hill on June 22. Our report of the hearing follows:
There is no debating the fact that the financial crisis has adversely impacted small businesses. Indeed, this fact was the common theme that ran through the opening statements of a recent hearing held by the House Committee on Small Business.

Following opening remarks by Representatives Sam Graves (R-MO) and Nydia M. Velazquez (D-NY), Chairman and Ranking Member respectively, Treasury Secretary Timothy Geithner delivered a summary of his written testimony on the “State of Small Business Access to Capital.”

Why were small businesses hardest hit by the financial crisis? Part of the answer obviously lies in their size and ability to withstand the storm. But mostly because many small businesses were concentrated in areas that had to do with real estate and construction—sectors which were hardest hit by the financial crisis and resulted in massive job losses. In response, Congress passed the Small Business Jobs Act of 2010 to boost small business access to capital through “three primary small business financial components.” These include:

  • Additional modifications to the SBA Capital Access Programs
  • A State Small Business Credit Initiative
  • A creation of the Small Business Lending Fund (SBLF)

The last two components took center stage of the discussion at Wednesday’s hearing. These two initiatives were primarily supposed to “bolster the capital available to community banks so they will lend to small businesses” thereby enabling the latter have access to working capital for growth and increased production, as well as investment purposes. Despite these initiatives, access to capital has become rather difficult for small businesses, leaving most Committee members—mostly from constituencies with massive numbers of small businesses—very disgruntled. Congresswoman Nydia Velazquez, ranking member on the committee, churned out a bunch of statistics to support her claim that none of the initiatives were living up to the task for which they were passed:

“Unfortunately, while credit conditions have loosened for borrowers, we are not seeing corresponding increases in overall commercial lending. In fact, lending is now below the level reached in June 2006, declining by $15 billion in the most recent quarter. Total small business loans dropped 2.4 percent from $624 billion in December 2010 to $609 billion in March 2011. Small loans of less than $100,000 were down by 2.9 %, while large loans outstanding declined by 2.2 percent. From the broadest possible view, small businesses are getting less capital than they did 5 years ago.”

Perhaps, more appropriate words to describe the general sentiment of most Committee members lay in the words of Chairman Graves when he sought to quiz Secretary Geithner:

“We seem to have a gap here. We hear in testimony every single week from bankers that come in here and tell us they have got money to lend, yet we have small businesses come in here every single week also tell us they can’t get capital. We’re trying to find a reason for them? What is the problem with this divide no one seems to cross?”

Secretary Geithner concurred with Chairman Graves on the fact that small businesses still had difficulty in accessing credit and more working capital. But he argued that the financial crisis caused a huge amount of damage, and would take a significant amount of time to recover. Finally, the credit damage from the crisis hurt a lot of small banks’ capacity to lend the as well as the “classic lending channels” that small businesses rely on. As a result of which examiners across the banking agencies have become more careful as they are looking back and reflecting on their judgments prior to the recession on giving out loans. It is edifying to note that the Secretary stressed the need for caution on the part of lenders (banking agencies); however, it should not be overdone. When quizzed by Rep Velazquez as to what specific guarantees he could provide to ensure small businesses had ready access to capital, Geithner stated that the Treasury Department, and for that matter government could not compel banks to lend; nevertheless, the initiatives had very “powerful incentives” for community banks to lend to small businesses.

Secretary Geithner outlined a 5 point strategic plan the Administration was undertaking to enable small businesses to expand and invest:

  • Providing a “significant amount” of tax relief targeted to small businesses
  • Helping small businesses get access to working capital on more favorable terms
  • Regulatory reform: leading a government-wide review to fix rules that hurt small businesses
  • Federal contracting options for small businesses
  • Placing a high priority on helping small businesses access foreign markets.

[Reported by Fertaa Yieleh-Chireh]

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