Entrepreneurs are a crucial part of our economic fabric. They create jobs, challenge convention and find new ways to solve old problems. But U.S. entrepreneurship is on the decline. The number of companies less than a year old as a share of all businesses has fallen nearly 44 percent between 1978 and 2012, and in 2008, we hit a disturbing milestone: The percentage of new businesses created that year was smaller than the percentage of businesses that closed down. That’s a serious problem for our economy, which depends on new businesses to hire and pump new blood into our markets.
What prompted this turn for the worse? Many factors may have contributed, but one development is having a definite impact: It’s become harder for entrepreneurs to access loans or other sources of funding for their businesses. The recession choked off many traditional sources of financing, with a particular impact on bank loans. In fact, many banks, still cautious from the downturn, have reduced or eliminated loans valued below $250,000. Other banks simply won’t lend to businesses with annual revenues of less than $2 million. This change has hit small businesses particularly hard, as 68 percent of small businesses seek loans of $250,000 or less, and 50 percent seek loans of $100,000 or less.
As a result, small business loans account for a mere portion of what they were pre-recession. Small business share of total bank loans sunk from almost 50 percent in 1995 to 30 percent in 2012. Unsurprisingly, access to capital has become such a challenging issue for small businesses that 91 percent of small business owners rank it as a top concern.
If entrepreneurs can’t secure that first loan or line of credit, they can’t get their projects off the ground–no matter how good their ideas or how hard they’re willing to work. And, inability to access capital can cripple a business as it grows. A shortage of funding often means small businesses can’t invest in new technologies, hire more workers or even weather a rough patch.
Entrepreneurs–a group of people known for their resiliency and willingness to push boundaries–have responded creatively to the access to capital problem. Many have turned to new financing options, such as online lending or crowdfunding. But while these new options can be great resources, many are unregulated, leaving small business owners vulnerable to unscrupulous lenders and loans with outrageously high interest rates. These types of abusive loans can easily sink a small business and damage local communities.
Small Business Majority is leading the charge to solve the access to capital problem and help ensure entrepreneurs have the resources they need to secure fair and transparent funding. This summer, we launched two related access to capital initiatives for small business owners: our Access to Capital Resource Portal and the Small Business Borrowers’ Bill of Rights.
The Access to Capital Resource Portal is a comprehensive online information center for small business owners who need reliable information on access to capital. The website provides helpful overviews of alternatives to traditional bank loans–like Community Development Financial Institutions, community banks, credit unions, online lending and crowdfunding–and a list of reputable agencies, organizations and information that can help small business owners make informed decisions on loans. The Portal also highlights resources specifically for women, low-income, veteran, minority, LGBT, disabled and other underrepresented business owners.
As part of a coalition of nonprofit and industry lenders, credit marketplaces, brokers, think tanks and small business advocates, we helped launch the Small Business Borrowers’ Bill of Rights, which focuses on putting the rights of borrowers at the center of small business financing. The Small Business Borrowers’ Bill of Rights is a list of basic rights that should be provided to small business borrowers, such as the rights to transparent pricing and terms, non-abusive products, non-discrimination and fair collection practices. Several members of the small business financing industry have backed the Small Business Borrowers’ Bill of Rights and signed onto these principles. Entrepreneurs can view the list of signatories here.
It’s no secret that small businesses are the backbone of our economy. They created nearly 2 million of the roughly 3 million private-sector jobs generated in 2014, and entrepreneurs are leaders in driving innovation and embracing new technologies. But small businesses can’t thrive–or even exist in many cases–without access to capital, and that can be devastating to our economy.
It’s urgent that we ensure small businesses have access to capital. Small Business Majority is working hard to tackle the access to capital problem, and we’ve partnered with lenders, small business owners and business organizations to do so. But we need more people on board. It’s especially important that lawmakers take action on this issue–lawmakers can take simple steps, like finalizing the rules for crowdfunding, to make a big difference. If legislators really care about helping small businesses thrive, then it’s time for them to even the playing field for small business loans.