startups

‘Buyer Beware’ Is No Way To Fund A Small Business – Forbes


Two trends are coalescing in ways that threaten the nation’s small businesses, particularly the underrepresented women, minorities, veterans and immigrants for whom entrepreneurship represents both a chance at personal achievement and a way to climb the economic ladder.

The first, developing over the past few years and just now coming into focus, is a nationwide decline in the number of new businesses being created. Dubbed a “startup slump” by economists, it is a decline that — unsurprisingly — became acute during the Great Recession, yet unlike jobs and housing, failed to rebound during the recovery. According to the U.S. Census, only 8% of businesses were formed in 2015, down from a robust 12.5% of businesses that were new in 1980. Since 2000, the slump has even expanded to include the seemingly invincible tech sector. Lawmakers in Washington, D.C., cited a number of reasons for the nation’s entrepreneurial slump when they recently introduced the bipartisan Enhancing Entrepreneurship for the 21st Century Act, including rising student debt, an aging workforce and slowing population growth (native born and immigrants) and industry concentration. The act notes that entrepreneurship is on the decline in all 50 states.

The full impact of these numbers really hits home when you consider that small businesses make up 99% of all U.S. businesses, employ nearly half of all private-sector workers and account for 44% of the country’s economic output. Any decline in entrepreneurship necessarily means an accompanying loss in productivity, job creation, innovation and community revitalization.

The second longstanding and unfortunately well-known trend is the difficulty that both emerging and established small-business owners have accessing responsible and affordable capital. This is particularly true for women, minorities and immigrants. Women, for example, received only 2.2% of venture capital funding in 2018.

Part of the difficulty stems from standard lending practices: Traditional banks and lenders aren’t generally focused on lending to the little guy — which is to say, business owners seeking loans of less than $250,000. According to a survey by Federal Reserve banks, 57% of startup entrepreneurs sought loans of $100,000 or less in 2018. That means the majority of potential entrepreneurs that apply may not get approved.

During the Great Recession, small-business lending tightened further. One harmful side effect of this capital desert was to drive those seeking startup or expansion capital to highly risky, costly loan products. Billed as “fast and easy” loans and readily available online, these vehicles can ruin an individual’s credit rating, business and livelihood.

As the CEO of a community development financial institution specializing in microloans to underserved populations, every day I see how many small-business owners are caught between loan denials from traditional financial institutions and predatory offers from unregulated fintech lenders. Analysis by my organization found that small businesses pay APRs of 94% on average for these types of alternative loans, with one loan as high as 350%, without these rates ever being disclosed to them. Furthermore, protections and disclosures that are considered standard in consumer lending do not apply to small-business lending.

We don’t even have a good data set to assess how much small-business lending is happening, who is and is not being served in the current market, who is providing access to needed capital and whether the products available are the best fit to help businesses grow. Congress approved legislation to understand the problem of access to capital nearly 10 years ago, but no action has been taken. Section 1071 of the Dodd-Frank Act requires financial institutions to keep particular data about credit applications from women- or minority-owned businesses and small businesses. For over a decade, the Consumer Financial Protection Bureau has failed to issue regulations to start implementing the small-business lending data requirements that are mandated in its charter. We cannot manage what we cannot measure. Implementing regulations for data collection under Section 1071 will be a critical step forward — because sunlight is the best of disinfectants.

But there are signs of relief, and these should be supported and encouraged. States have already taken action. Earlier this year, California’s Department of Business Oversight began drafting regulations to implement the state’s small-business Truth-in-Lending law — the first in the nation to secure a business owner’s right to transparent costs and terms. In another move to protect small businesses, New York state passed a law banning confessions of judgment, in which small-business borrowers waive their legal rights agreeing in advance to lose any potential dispute, often with disastrous consequences.

At the federal level, in addition to the recent legislation introduced in Congress to understand and address the nation’s startup slump, a resolution was introduced this year to promote fair, competitive and transparent access to capital for small businesses and is modeled on the Small Business Borrowers’ Bill of Rights. What’s more, legislation calling for greater small-business borrower protections was announced to be in the works during a House Financial Services Committee hearing, and bills to outlaw confessions of judgment nationwide and expand Fair Debt Collection Practices Act protections to cover small-business loans are already moving through the legislative process.

In statehouses and on Capitol Hill, momentum is building to promote innovation in our small-business capital markets while protecting the nation’s 30 million small-business owners from predatory lenders. Given the enormous contributions of American small businesses, we need to get the job done. Not just in a few states with a few fixes around the margins, but uniformly, across the nation, wherever an individual decides to pursue their entrepreneurial dream.



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