At a conference organized by the Federal Reserve on small business, Chairman Ben Bernanke stressed that the Federal Reserve wants banks to “adopt a balanced approach” toward small business lending. Bernanke wants bankers to:
“. . . foster an environment in which lenders do all they can to meet the needs of creditworthy borrowers while maintaining appropriately prudent underwriting standards.”
In other words, he wants banks to do more lending to growing companies.
In order for the economy to move forward, small businesses, which generate the majority of new jobs created in the U.S., must operate in an environment that will help them to thrive. Making capital available to creditworthy borrowers is an important part of creating such an environment. Although small business funding is more free flowing than it was during the depths of the credit crunch in 2009, it is still challenging for many growing companies to get the capital they need to expand.
I see this nearly every day. Sometimes a small company will win a big contract, but in these days of “lean and mean” staffing, they cannot afford to have extra workers waiting around for projects. The companies must quickly ramp up staff and order additional equipment to get projects off the ground. In such cases, if the small business owner is unable to secure working capital right away, he or she risks losing the contract. Thus, the speed of the transaction, rather than the interest rate, is of critical importance.
Bernanke said that:
“Small businesses also help our country compete globally; they often offer a level of agility in bringing innovative products to the global marketplace that larger firms cannot match. At home, many entrepreneurs do more than provide important goods and services — they and their businesses help sustain the vitality of the neighborhoods in which they live and work.”
All of this is true. Entrepreneurs are driven to succeed and want to make a difference in their areas. As their companies expand, so do the employment opportunities for their neighbors.
The Fed’s Small Business and Entrepreneurship during an Economic Recovery conference focused much-needed attention on companies started by women, immigrants and minorities.
Our most recent study found that small, regional banks; credit unions; community development financial institutions (CDFIs) and microlenders are addressing these needs at a much higher rate than big banks are. While large lenders approved less than 10 percent of funding requests in October, small banks (46.3 percent loan approval rate) and alternative lenders (61.8 percent loan approval rate) were much more likely to make funds available. Often the loan applications come from women- and minority-owned firms, many of which operate in economically depressed areas.
While government cannot solve all problems, there are some things that the country can do to foster an environment for small businesses to grow:
1. Restore the 90 percent loan guarantees associated with SBA loans to small businesses and waiver the processing fees. This program worked very well until it expired earlier this year.
2. Make immigrants feel welcome. A significant number of small businesses are founded by immigrants, and the success rates of these companies are quite high. Recently, Forbes reported that 40 percent of America’s top corporations were co-founded by immigrants or their children. Among them: Yahoo’s Jerry Yang (Taiwan), Google’s Sergey Brin (Russia), and Apple’s Steve Jobs, whose parents came from Syria.
3. Invest in IT education and training. Like it or not, we are in a technology-driven economy. We must embrace that fact and encourage development of businesses in those areas.