Despite the bank bailout, American small businesses have had limited access to financing. The blame game has focused on the greed of bankers who are taking advantage of the “free” (meaning zero interest) dollars given to them by the government and using that to make Wall Street bets as opposed to lending to small businesses and homeowners. But are they really to blame? Money is efficient. It finds its way to places that give the best returns. It so happens that the best returns no longer come through lending activities but from high frequency trading. The fact that the bankers asked for and were given the money to engage in this activity at no cost to them was a mistake the Bush and Obama administrations made. No question about it. But why blame the bankers? They are simply fulfilling their obligations to their shareholders. Should they make such obscene amounts of money in bonuses? Why not? The amount of money they contribute back to the country is a matter of taxation and tax reform. That said, proprietary trading seems to be on its way out and banks are gradually returning to their boring old lending practices.
In a recent survey, nearly 35% of small businesses clearly mention that availability of credit/loans is impacting their business, as shown in the chart below.
The real issue though is the lack of good options for delivering financing to small business in an efficient manner. Bank consolidation over the last decade has left business lending to small businesses largely in control of large and mega banks. Small businesses can and often do turn to the Small Business Administration (www.sba.gov) for financing. The SBA has a number of micro-financing schemes that allow small businesses to borrow a maximum of $35,000. SBA data suggests the average amount borrowed hovers around $13,000. The delivery of those loans however is done through various local, community and national/global banks. The process is onerous, locks in collateral and is often not available to the weakest of small businesses. These initiatives also do not help START small businesses as most loans require a documented operating history. Small businesses therefore often start businesses by using credit cards as a way to finance ventures. This is dangerous as cards have higher interest rates and defaults can negatively impact personal credit histories for years to come. The result is a dampening of the ability of individuals to take risks. The result is less innovation and fewer small businesses.
Perhaps this is an opportunity for us to look to the third world where micro-finance lending has created whole new businesses by the hundreds. These businesses are small but successful enough that loan repayments are above the 90% level. Because of the small amount of money in each loan, the risk per loan is low often requiring no collateral commitments. Micro-financing organizations such as Grameen Bank have turned in impressive performances both in terms of the amount of money they have lent over the years and the number of businesses they have helped. Grameen Bank’s history is well documented having been in existence since 1976. In some ways they could be hailed as the world’s most successful venture capital firm. By the end of 2009 Grameen had lent over $8 BILLION (since inception) in micro-credit to nearly 8 million small businesses. What is impressive is the low default rate. At the end of 2009 less than 3% of the loans outstanding were overdue. All of this has been accomplished in an impoverished country like Bangladesh with 2500 branches and about 13000 loan agents.
- Access to low interest financing with low or no fees. Access is limited to companies with fewer than 20 employees (80% of all small businesses)
- A cap equivalent to current micro-finance initiatives or slightly lower (say a maximum of $35,000)
- No collateral requirements but the applicant must submit a business plan
- No impact on personal credit history if the loan is not repaid
- Operational support for small businesses including better rates on things like internet access, mobile service plans, transportation and logistics, import/export, legal services, banking, insurance and talent acquisition.
Micro-finance in developing countries has proven to work well and it demands serious consideration as an option here as well.
Abhijeet Rane
Techaisle