The Small Business Lending Crisis

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The Small Business Lending Crisis

As we highlighted in our May 2013 issue, entrepreneurs have always been vital to America's economy, not just for the products they create, but also for the jobs they create. According to a study by the Kauffman Foundation, over the past 30 years, companies that were less than five years old accounted for nearly 100 percent of the net job growth in the United States.1 Small businesses are also highly innovative; they are awarded 13 times more patents per employee than larger companies.

Unfortunately, in the years since the recession officially ended, many small businesses have not been able to access the capital they need to hire more employees or to buy new equipment. As Karen Mills, former head of the Small Business Administration, explains in a Harvard Business School working paper, small businesses are starved for cash.2

While large corporations can issue bonds, commercial paper, and even equity in the public capital markets to raise capital, small businesses have to rely on banks. About three-quarters of business owners say that banks are their primary source of financing, with 48 percent borrowing from a major bank and another 34 percent relying on a regional or community bank for financing. But even that access to capital has disappeared, as banks increasingly refuse to lend to small businesses.3

For example, a May 2014 survey of small business owners by the National Federation of Independent Businesses (NFIB) found that credit access is tighter today than in the prior recovery, with fewer small businesses reporting that their credit needs are being satisfied.4

Similarly, the Federal Deposit Insurance Corporation's Call Report data reveals that commercial bank loans with principal of $1 million or less, which are typically borrowed by small firms, have dropped throughout the first half of 2013, and are down about 21 percent since the financial crisis.5

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