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More than Money – Ripple Effects of Financial Services for Main Street

By John Soroushian, John Richter

Wednesday, September 27, 2017

A well-functioning financial system has a ripple effect far beyond simply expanding the economy. 

Ensuring access to capital for qualified Main Street small businesses and entrepreneurs, which has been an area of focus for BPC, directly impacts America’s capacity for economic growth and job creation. What is less understood and discussed is that if Main Street can’t access capital, then other less tangible benefits of financial services are also at risk. 

The number one self-reported reason that Americans enjoy being small business owners is because it means they are their own boss.

  • Upward social mobility and greater opportunity for average Americans  

Access to capital allows people with little financial means, but the right work ethic and character, to create a business and become successful.  

The average small business requires $30,000 to start, and then regularly needs money for salaries, operations, inventory, and expansion. These costs can put entrepreneurship out of reach for many people who are not already financially well-off. However, a properly functioning financial system can help remedy this problem by allowing qualified individuals of modest economic backgrounds to raise the money necessary to start or buy a business. That in turn gives them a pathway for upward socio-economic mobility, potentially more rapid and robust than would otherwise be possible. 

For example, Tom Monaghan grew up in an orphanage and a series of foster homes, then twice dropped out of college due to his inability to pay tuition. But a small dollar bank loan enabled him to buy a pizza shop in a small town in Michigan, which he slowly turned into a billion-dollar franchise called Domino’s Pizza.    

  • Freedom to be one’s own boss 

The number one self-reported reason that Americans enjoy being small business owners is because it means they are their own boss.  

The need for a regular income can prevent many people from starting their own business and becoming their own boss – only 32 percent of new small businesses surveyed by the Federal Reserve were profitable in 2016, while 68 percent broke even or operated at a loss. This suggests that even if someone is willing to take a pay cut, they might not be able to afford starting or buying a business without first accumulating considerable savings to invest.  

Loans to qualified entrepreneurs can allow them to borrow against future profits, so they can pay themselves during unprofitable years. As a result, more people can have the opportunity to work for themselves without having to be wealthy at the outset. 

  • Remove barriers to entry in underserved or non-existent markets, giving more choice  

Established firms sometime miss the opportunity to enter a market or fund a new product, since they either don’t see the new opportunity or do not want to divert capital from more profitable businesses. For example, Kodak invented the first digital camera, but did not want to shift capital from its vastly more profitable traditional camera business to fund the new technology that is now ubiquitous.  

The gap left by established firms is frequently filled by entrepreneurs with access to capital. These entrepreneurs often explore underserved markets and bring innovative new products to consumers. For example, Sam Walton used a $20,000 loan from his father-in-law to start Wal-Mart, which gave small towns in the rural south access to a discount retailer at a time when established firms were focusing on larger towns and urban areas.

A well-functioning financial system has a ripple effect far beyond simply expanding the economy. 

Responsibly providing access to small business loans and other financial services not only fuels economic growth, but also gives Americans more economic opportunity, freedom, and choice. These benefits are critical to improving quality of life in ways that economic statistics can’t measure.  

Financial services for Main Street business are about more than money – they are about hope.  

KEYWORDS: TASK FORCE ON MAIN STREET FINANCE