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Main Street Matters: Ideas for Improving Small Business Financing

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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.

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:

  • 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?

  • 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?

  • Can capital markets better provide financing to small businesses?

  • 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.

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