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Main Street Matters: Ideas for Improving Small Business Financing

Wednesday, August 1, 2018

Main Street Matters: Ideas for Improving Small Business Financing

Letter from the Co-Chairs

Small businesses have long held a vaunted place in the U.S. economy and in the American imagination. This isn’t surprising because the American project, from the beginning, was entrepreneurial at its core.

From iconic figures like Benjamin Franklin, who started his own publishing house to provide news services to prerevolutionary Pennsylvania in 1728; to Sam Walton, who opened his first Walmart store in Rogers, Arkansas, in 1962; to Steve Jobs, who founded the Apple Computer Company in a suburban Los Altos, California, garage in 1976, the drive to seize an idea and turn it into reality has always propelled the nation’s growth and economic vitality as well as Americans’ collective sense of identity. In short, the story of Main Street realizing vast success and generating wealth has been integral to the larger story of the United States and of the limitless possibilities it holds.

We are enthusiastic advocates of this story because small businesses—even those that don’t grow into a Walmart or Apple—provide a critical path to economic mobility and security that is available across all regions of the country. The United States is a global leader in innovation and economic dynamism, both of which are driven in large part by start-ups and small firms. High-growth small businesses develop new ideas that support a vital U.S. economy, while Main Street small businesses provide stability and cohesion in communities and support a strong middle class. Starting a small business, creating something new, and taking charge of one’s own economic destiny remains a dream for countless Americans, regardless of background or circumstances—and we are all stakeholders in nurturing that dream.

And yet, there is evidence that it is becoming more difficult to start and maintain a small business in the United States. Entrepreneurship has been slowly declining in recent decades, with the share of new firms in the U.S. economy decreasing since the 1970s. More recently, the Great Recession hit small enterprises hard, and lending to small firms has recovered more slowly than lending to large firms. The challenge of accessing capital is especially pronounced for entrepreneurs seeking loans of $250,000 or less. Small operations located in rural areas and women- and minority-owned firms have an even harder time accessing financing.

Fortunately, support for small businesses is a rare oasis of bipartisan consensus, among politicians and in the broader public. According to a Gallup poll, roughly 70 percent of Americans have a lot of confidence in small businesses. And in Washington, members of both parties regularly express concern about the health of small businesses and an interest in policies that support them.

Given our backgrounds—a former head of the Small Business Administration and cabinet member; a former U.S. senator and chair of the Senate Small Business Committee; a former bank CEO; and a former head of the Small Business Administration’s Office of Investment and Innovation and current angel investor—we share a keen interest in ensuring that the nation continues to provide unparalleled opportunities for small businesses and entrepreneurs to thrive in. This report describes what we have learned in speaking with a wide range of experts on small business financing, including current and former regulators, academics, traditional banks, financial technology companies, other providers of capital, entrepreneurs, and small business advocates. We offer an agenda of pragmatic recommendations to make the financial system work better for small businesses and entrepreneurs that we are confident can secure bipartisan support.

Paul Greig

Olympia Snowe

Karen Mills

Mark Walsh

The Bipartisan Policy Center established the Task Force on Main Street Finance to find ways to make the financial system work better for small businesses and entrepreneurs, which are critical components of the U.S. economy. The task force focused on four key questions:

  1. What kinds of data would help policymakers, researchers, and lenders to better understand small business financing, including potential inequities in the provision of small business credit, and how could that data best be collected and assessed?
  1. How do financial regulations, especially those put into place following the 2007-2008 financial crisis, impact small business lending, and is there room for improvement?
  1. Can capital markets better provide financing to small businesses?
  1. How is technology changing the provision of credit to small businesses, and how should the government respond to these changes?

The report starts with background and context on the importance of small businesses to the U.S. economy as well as recent trends in small business health and access to credit. The first section discusses ways to improve the quality and quantity of data available on small business financing. Good data are necessary both to improve credit-application processes and to enable lawmakers and regulators to make better-informed decisions when developing government policy. The second section reviews financial regulation that impacts access to credit for small businesses and recommends ways to recalibrate regulations to make them more efficient and effective. The third section delves into how to make U.S. capital markets work better for small businesses. The final section sets forth ideas on how policymakers can promote innovation in financial products and services and better integrate technology into financial markets.

Summary of Recommendations

Section I. Improving Data on Small Business Financing

  • Congress should move the collection and storage of small business lending data required under the Dodd-Frank Act from the Consumer Financial Protection Bureau (CFPB) to the Office of Financial Research (OFR).
  • Congress should mandate that the Office of Advocacy in the Small Business Administration (SBA) work with the OFR to review and publish assessments of the data collected.
  • The CFPB should implement the Dodd-Frank Act’s data-collection provisions in stages, beginning with loan-origination data already collected by lenders.
  • The Internal Revenue Service (IRS) should make small business tax data available to researchers.
  • The SBA should digitize, aggregate, and anonymize select data from the Small Business Investment Company (SBIC) and Small Business Innovation Research (SBIR) programs and make the data available to SBA-approved entities.
  • Congress should require the IRS to update its Income Verification Express Service (IVES) program to allow for faster access to summarized income tax information for loan applications; Congress should grant the IRS the authority to pay for this update by collecting reasonable fees from investors and lenders.

Section II. Recalibrating Financial Regulation

  • Congress should establish a national commission to conduct a comprehensive review of financial laws and regulations.
  • Congress should establish a pilot program to test the efficacy of coordinated bank examination teams.
  • Congress should subject additional financial regulatory agencies to the Small Business Regulatory Enforcement Fairness Act (SBREFA) process, which mandates consultation with small businesses for certain rulemaking processes.
  • Financial regulatory agencies should update their definitions of a lender’s Community Reinvestment Act (CRA) assessment area to account for recent innovations in banking.
  • Regulators should ensure that their CRA regulations and supervisory practices encourage small business lending and investment to the same degree that they encourage other kinds of CRA lending and investments.
  • The U.S. Treasury Department should undertake a comprehensive review of anti-money laundering rules to assess the costs of implementation and recommend ways to reduce their negative impact on lending.
  • The federal prudential bank regulatory agencies should issue joint guidance to encourage innovation that will better and more efficiently detect money laundering and terrorism financing.
  • The CFPB should adjust and clarify its qualified mortgage and ability-to-repay rules to better reflect the circumstances of small business borrowers who may not have a steady source of income.
  • The SBA should build off the success of the QuickPay program to reduce the amount of time it takes federal small business contractors to get paid.
  • While the Co-chairs have a range of opinions about the institutions to which this should apply, Congress should direct the Federal Trade Commission (FTC) to develop a simple disclosure form for loans and advances to small businesses.
  • The federal banking agencies and the Federal Trade Commission should jointly assess whether small business borrowers find it difficult to understand the terms of the loan documents.
  • Congress should amend the Fair Debt Collection Practices Act to apply to debts incurred by small businesses with less than $500,000 in annual revenue.

Section III. Making U.S. Capital Markets Work Better for Small Businesses

  • The Securities and Exchange Commission (SEC) should review Regulation CF to identify ways to make it more effectively support crowdfunding campaigns, assess the costs and benefits of collecting more data, and analyze disparities in crowdfunding among different demographic groups.
  • Congress should give the SEC the authority to raise the cap on how much wealthier individuals can invest in crowdfunding campaigns.
  • The SBA should work with small business mentoring and training partners to identify gaps in these types of services to small businesses and take steps to improve access, including ensuring the agency and its partners are maximizing technology and e-learning strategies.
  • SBA district offices should further partner with regional business accelerators and incubators to improve access to business resources and venture capital funding.

Section IV. Promoting Innovation and Integrating Technology

  • Federal and state financial regulatory agencies should establish technology and innovation offices. Each office should create a “greenhouse” to work in partnership with the private sector to use technology to promote responsible financial innovation with prudent risk management.
  • Congress should amend the National Bank Act to authorize the Office of the Comptroller of Currency (OCC) to issue a federal charter for nonbank financial companies.
  • States should continue to work together through the Conference of State Bank Supervisors to harmonize requirements, supervision, and coordination for nonbanks operating in multiple states.
  • Federal bank regulatory agencies working through the Federal Financial Institutions Examination Council (FFIEC) should develop joint guidance for third-party vendor management.
  • The FFIEC should develop a common standard to certify when vendors have complied with third-party guidelines.


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