If small businesses don’t recover from the coronavirus pandemic, neither will the rest of the economy.
Across America, in big cities and small towns, auto mechanics shops, restaurants, family retailers and small industrial businesses are creating two-thirds of all net new jobs. In addition, the money people spend on these businesses tends to stay local and represent 44% of all economic activity.
Yet despite these statistics, most small businesses face a common challenge: accessing cheap capital. Ergo, President Joe Biden’s proposal for a new public option in his Rebuild better agenda: a direct loan program for small businesses administered by the Small Business Administration.
Access to credit
Businesses large and small alike need capital to buy products, invest in technology, hire more people, and weather economic storms. But that’s where the similarities between large and small businesses end.
We live in an age of monopolies in technology, agriculture, retail and finance. And cheap debt is only available to most dominant companies. This round of strengthening – where the biggest and wealthiest companies have access to the cheapest credit – is deepening inequality at a frightening rate. Tech giants like Apple AAPL,
borrow cheaply and buy back shares to drive up the stock price. Private equity funds such as Blackstone BX,
pay dividends to investors and bonuses to CEOs using debt.
In other words, giant corporations and Wall Street firms can borrow cheaply – $ 11 trillion and more – and make more money from financial engineering than from productive contributions to the economy. economy.
What about small businesses? Banks no longer deny that 70% of small business loan applications. Because these companies are not making hundreds of millions in income, they cannot go to the bond or stock markets and raise money on the cheap.
Fewer local banks to serve small businesses
As a result, some small businesses tap into personal savings or home equity, a luxury that is not available to many BIPOC entrepreneurs held back by racial and gender wealth gaps. So, they turn to credit cards or high interest fintech loans, the equivalent of using payday loans to run a business.
How did we get here? Previously, banks were bound by law to their communities and therefore had to lend locally. Banking deregulation has changed that.
Over the past 40 years, deregulation has allowed a tsunami of mega-mergers and bank consolidations. Today there are fewer regional and community banks, and large swathes of America do not have a single bank.
From MarketWatch: Why the recent wave of regional bank mergers is far from over and you could benefit from it
And as a recent study shows, these trends have tightened the supply of credit in communities, leading to lower local business start-ups, jobs and wages. In addition, large banks have little incentive to take out loans to small businesses. This is because they cost the same to take out only large loans, but generate lower profits.
And so, in the midst of a global pandemic, recent survey data shows that 44% of small businesses have less than three months of cash flow. With the Delta variant raging and the pandemic far from over, small businesses will need capital to weather the storm.
How would it work
If the Biden Build Back Better proposal is accepted, the SBA could help small businesses immediately by doing the following:
Lend directly to all small businesses with single digit interest rates up to $ 150,000, and government contractors or small manufacturers could borrow up to $ 1 million.
The SBA would partner with community development finance institutions, which are dedicated to serving low-income and low-wealth communities to reach underserved borrowers. The CDFIs would process the loans and collect a commission, and the SBA would keep the loan and do the rest.
Create a transparent online loan portal so small businesses can apply and get a decision quickly.
Launch a pilot project to finance worker cooperatives so that employees can buy businesses and prioritize workers and communities.
While the SBA’s direct loan proposition isn’t the most glittering, it could fuel a fair economic recovery by supporting the potential of existing businesses and budding entrepreneurs. While some may view SBA direct lending as a threat to banks, we see it as a way to fill in the gaps. The SBA would do what big banks are no longer equipped to do: support small businesses and create jobs.
In addition, the direct lending program could highlight the need for a national industrial bank to finance large-scale enterprises in the national interest, such as building a green economy. The program could also complement efforts to launch state and local public banks.
The White House said it best: President Biden’s reconciliation plan lays the groundwork for U.S. small businesses to win the 21stst century.
So, Congress, let’s do it.
Ameya Pawar is a member of the Open Society Foundations and the Economic Security Project. He is also a senior advisor to the Academy Group and served two terms on Chicago City Council. Terri Friedline is Associate Professor of Social Work at the University of Michigan and author of “Banking on Revolution: Why Financial Technology Won’t Save a Broken System”.
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