Main Street Leads the Way

By Karen G. Mills and Olympia Snowe
Jan. 11, 2018
U.S. News & World Report

Small businesses and entrepreneurs fuel the economy. We must give them the tools they need to succeed.

When we rely on a car to take us where we need to go, our number one priority is ensuring it has plenty of fuel. Policymakers must do the same when it comes to our nation’s greatest vehicles for economic growth and opportunity: our entrepreneurs and small businesses.

Small businesses account for roughly half of private sector jobs, and are responsible for approximately 60 percent of net new jobs since 1995. Sufficient credit and financing enables their success. Yet, many small businesses struggle to access funding at reasonable terms. We cannot allow this obstacle to needlessly shortchange America’s future.

Research reveals that when small businesses can quickly access the capital they require, they grow the economy and raise wages. However, new regulations, emerging technology and the decline of lending based on relationships with customers have created new issues and challenges for policymakers to explore. We believe that policymakers can and should address these issues with bipartisan solutions.

A decade ago, Wall Street was the epicenter of America’s worst financial crisis since the Great Depression, but Main Street businesses were hit especially hard – shedding a net 11 percent of jobs compared with 7 percent at larger firms.

This was largely due to small businesses’ reliance on bank credit rather than raising money by issuing stocks and bonds, which are actions generally taken by larger firms. In fact, the average small business holds only 27 days of cash in reserve. When bank credit froze during the crisis, many began shutting their doors.

Problems in small business lending persist. A Federal Reserve study reported that in 2016 about two-thirds of small businesses with revenues under $1 million faced financing shortfalls. Further, 70 percent of small businesses of that size sought financing of less than $100,000 and 86 percent less than $250,000 – a loan amount difficult for a traditional bank to make profitably.

The following are steps that can help small businesses and entrepreneurs stay viable and fuel economic growth:

First, we must continue to build upon and adapt post-crisis financial regulations by having lawmakers find ways to adjust regulations to benefit entrepreneurs while maintaining the security of our financial system – which are not mutually exclusive goals.

Second, technological advances have prompted a surge in new tech companies known as “fintechs” that have the potential to help fill the gap in small dollar loans. But a sound regulatory framework is needed to provide necessary transparency, a level playing field for similar activities, and appropriate protections for small business owners.

Third, lending decisions based on analytics and computer algorithms can reduce costs and accelerate lending. However, they can also limit bankers’ discretion to lend to clients with attributes not easily captured by statistics, such as character and a strong reputation in the community. We must leverage technology without losing the ability to offer small business borrowers the right loan product under the best terms for them.

Fourth, policymakers continue to “fly blind” when it comes to data on the actual state of small business lending. During the Great Recession, limited information on small business credit access made it difficult to understand in real-time how the small business economy was performing and for policymakers to take data-driven action. Attempts to fill key gaps in data should be implemented without adding undue burdens on the financial system.

The good news is these issues are ripe for progress and cooperation in Washington, even in today’s polarized political environment. Small businesses are in every district and state – be they “red,” “blue'” or “purple.” They enjoy strong bipartisan support, with 73 percent of Republicans and 67 percent of Democrats expressing a “great deal” or “quite a lot” of confidence in them according to a Gallup poll. Both sides agree that small businesses are key to the economic growth we want for all regions of the country – including those who feel left behind by the recent upturn.

We are leading the Bipartisan Policy Center’s Task Force on Main Street Finance with former FirstMerit CEO Paul Greig and entrepreneur/angel investor Mark Walsh, to develop recommendations that policymakers can utilize to tackle this issue. The Task Force is traveling across the country to hear directly from lenders and small business owners so we can forge the most realistic and effective solutions.

The nature of small business lending has changed, but its pivotal role has not: entrepreneurs still require money to create jobs and maximize America’s economic potential. Smart policy is, in fact, achievable – and will help finance Main Street growth and ensure the American Dream is a reality for all.

Olympia Snowe, a Republican former senator from Maine, is a member of Bipartisan Policy Center’s board of directors, a senior fellow at the organization and cochair of its Commission on Political Reform.

Karen G. Mills, co-chair of the Bipartisan Policy Center’s Task Force on Main Street Finance, served in President Obama’s Cabinet as administrator of the U.S. Small Business Administration