Small businesses are the lifeblood of the American economy. They employ nearly half the workforce in the United States, account for 50% of GDP and drive new job creation. Despite their economic significance, the troubles these businesses face accessing capital has become a centerpiece of mainstream media. We’ve all heard their cries: “Banks won’t lend”; “credit is tight”; “alternatives are expensive”.
Just at a time when small businesses need additional support, an article published in the New York Times – “Do Romney’s Budget Pledges Threaten S.B.A. Loans” – raises questions about the Small Business Administration’s future pending the results of November’s presidential election. The SBA is a key facilitator of capital to small businesses. It offers a variety of loan guarantee programs aimed at promoting loans to small businesses that banks would not otherwise make, and it has been more important than ever as Main Street recovers from the Great Recession.
A reduction in SBA subsidies has the potential to dramatically limit the agency’s ability to extend financing to small and medium-sized businesses. Proponents of the cuts argue the SBA can maintain its impact, while reducing expenses from redundant programs and wasteful non-guarantee-related products. Opponents of the cut fear the SBA’s ability to extend new loan guarantees could be completely eliminated, stunting economic recovery even further.
Regardless of where one stands on the political spectrum, the fact is that the ability of small businesses to access capital is a critical component of restoring job creation and economic growth in America. One challenge in achieving this, however, is the backward lens banks and other traditional lenders apply when assessing a business’s creditworthiness. A look to the battered financials of many businesses during the recession hides the opportunities for growth and expansion that lie ahead.
The future is brighter than the past is dark, and the potential constraints the SBA may face could impact our country’s ability to realize its economic potential. That said, financial innovation in the private markets – especially innovation that addresses the small business sector – could more than offset disruptions to government spending, as capital and businesses start to connect in new ways.
While the results of the election are still a coin-flip, one thing is certain: both candidates will need to implement policy that serves small businesses to create jobs, stimulate growth, and drive economic recovery. The difference lies not in what they each want to achieve, but rather how they will achieve it.