Working to find actionable solutions to the nation's key challenges.

Jason Grumet and Aaron Klein: How will the candidates help small business?


Tuesday, October 27, 2015

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All politicians express support for small business. These enterprises are the engines of our economy and represent the entrepreneurial grit that has made this country great. Unfortunately, these rhetorical commitments to Main Street have not always been accompanied by meaningful actions. As a result many small businesses are finding it difficult to launch or grow, while others are failing altogether.

Since the misdeeds that led to the financial crisis of 2008, the federal government has adopted a myriad of regulations and requirements designed to reduce risk-taking by Wall Street. The quest for safer banks and greater financial stability is a good thing. However, we must be careful of what we wish for. The most stable financial system is one with no lending at all and many small businesses today are struggling to find credit.

Small businesses need to borrow money to open their doors, bridge gaps between sales and expenses, and expand operations. Nearly half of small businesses that had problems accessing capital were unable to grow their enterprise, and another 1 in 5 businesses report being forced to reduce benefits to employees due to a lack of capital. If these problems persist, they will stifle entrepreneurship, reduce economic growth, and further undermine an already vulnerable middle class.

Restricting access to credit was a natural and understandable reaction to a crisis caused in large part by excess lending. However, in a post-crisis world of low interest rates, reduced investor appetite for risk, and increased regulatory standards, big businesses with established access to the capital markets can find low-cost credit, while many small businesses either cannot obtain loans at all or have to pay very high rates.

Banks had over $780 billion in loans outstanding to small businesses at the onset of the 2008 financial crisis, then lending fell sharply. To this day, banks are lending less to small businesses than before the crisis, despite five years of economic recovery.