When the economy crashed in 2008, and fully bottomed out in June 2009 credit across the board froze. Consumer, enterprise and SMB lending all ground to a near halt and underwriters across the spectrum struggled to regain equilibrium after a crisis in mortgage underwriting bloomed into a plague that destabilized the entire global economic system.
The good news is that the bad news wasn’t worse news — the economy recovered, albeit unevenly and slowly. Five years after the worst of the carnage in the data out of the Federal Deposit Insurance Corporation (FDIC) showed that lending was beginning to normalize — lending to big businesses had recovered, consumer lending was showing signs of thawing as the mortgage markets began showing signs of coming back from the dead. The rising tide, it seemed, was lifting all boats.
Well, all but one boat: The SMB boat has seemed stuck in perpetual low tide when it comes to easy access to credit. While other forms of credit were showing signs of returned in 2014, SMB lending still trailed its 2007 peak by 17 percent. It wasn’t until late 2015 that the number of small businesses opened in the U.S. topped the number of ones that closed. As of 2017, as consumer credit use was approaching its pre-recession levels in the U.S., headlines about the almost decade long “startup slump” brought on by lack of access to capital first began making the rounds in headlines — and by last year the problem had made very little progress.
The program, the Opportunity Fund's Vice President of Policy and Research Gwendy Brown told PYMNTS in a recent conversation, is now more than a decade old — and while it would be unfair to say no progress has been made in the last 11 years, it is entirely fair to say that not nearly enough forward motion has been observed in this segment. What is as true today as it was in the year 2009, she said, is small businesses aren’t starting, lasting, expanding and thriving — because of inadequate access to capital. There’s not enough out there, and what is out there is often so expensive it is more of a liability than an actual offer.
“And what we are seeing over and over again is this is coming back to the same problem. We haven’t done what [the] Dodd-Frank [Act] required in terms of gathering data on this segment. We don’t understand the problems or where the breakdown points are — and small business owners nationwide are suffering today, and have been for over 10 years,” Brown said.
The good news, she said, is that while the problem is not new, it is getting new attention — in an economy that is reportedly surging, small businesses shouldn’t be slumping. Last week the bipartisan Senate Entrepreneurship Caucus introduced the “Enhancing Entrepreneurship for the 21st Century Act,” she noted, and the Consumer Financial Protection Bureau (CFPB) has confirmed it will be boosting its efforts. Progress is possible on the issue, Brown told PYMNTS — but not without gathering and analyzing the rights types of data to clarify the issue and put it into context.
Small business financing in the U.S. is and has been broken, Brown said, and the first step to solving that problem is actually gathering the data necessary to understand the shape of the problem. The authors of the Dodd-Frank Act, she noted, understood this — which is why Section 1071 was included to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. That data is important, Brown noted, because it is a key insight into who is getting funding, how they are getting it and what types of products are being offered.
“For example,” Brown said, “we might see that certain applicants on one demographic profile are being steered toward one kind of financing offers that is more beneficial or lower costs — while entrepreneurs of different backgrounds are steered in other, more expensive, directions even though their business profiles are similar.”
At the Opportunity Fund, Brown noted, in its work as a nonprofit small business lender closely working with SMBs, the group hears about these issues anecdotally and has a front-row seat to what a lack of access to capital costs up-and-coming entrepreneurs. Hit particularly hard are female and minority business owners, who tend to feel the sharpest sting from the capital shortage in the marketplace.
As the groups likely to go into the process without the funds to bootstrap themselves into existence until they started bringing in revenue — women and minorities are the most likely to helm the startups that can never really start because they can’t secure the funding they need to get off the ground — or expand to scale once they’ve launched. The data insights required by section 1701 of Dodd-Frank are just the kind of information regulators need to understand not just that the market is failing large classes of entrepreneurs, but exactly where and how it is failing. For over a decade, the CFPB has failed to issue regulations to even begin implementing the small business lending data requirements Congress mandated in the agency’s charter.
“To put it directly, until very recently the CFPB has fallen down on the job on this duty. They haven’t gathered this information — and unsurprisingly, without data in hand the problem isn’t just magically fixing itself and the consequence of that is the startup slump we have been hearing about for years.”
Moreover, she noted, that the data can make a difference isn’t a hypothesis that anyone has to prove at this point, because we’ve already seen that to be the case in other areas of lending regulation. Different sections of Dodd-Frank, she noted, mandated a whole host of new data points that had to be gathered around mortgage loans, lenders and borrowers. Since it was mortgages that managed to nearly bring the global economy to the ground — that section of the law was taken very seriously, Brown said, and mortgage lenders had to endure the disinfecting properties of sunlight when it came to their underwriting standards.
The result, she noted, is a mortgage lending industry today that is more fair, more transparent and less likely to create predatory products for consumers. SMB lending, she said, quite simply needs that same level of attention — or the problems that have plagued the industry over the last 10 years will continue for the next 10 — and the 10 after that.