What the Banks and the S.B.A. Could Learn From Silicon Valley
Last weekend, my family and I packed our car full of supplies and drove to a fire station in New Jersey to deliver goods to an area that had been hit hard by Hurricane Sandy. Like tens of millions of other Americans, we tried to make our small contribution. The experience was eye-opening for my children. They saw the devastation firsthand. And they got to see the volunteers organizing supplies and the Red Cross van delivering food to whomever needed it.
Somehow, when there is a natural disaster, Americans rally together to help one another. We don't rely on politicians in Washington to create policy and hope for change. We're willing to open our wallets and our hearts. We all know, it just as easily could have been us. This is true for corporations and individuals alike.
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And yet, it occurred to me that one can draw some interesting comparisons between hurricanes like Sandy or Katrina and the financial crisis that hit our country four years ago. The financial crisis may not have ripped down houses, but it did rip a lot of people out of them. Small-business owners may not have had to tape their windows, but many had to shut their doors. But the response to this crisis has been very different.
For many small-business owners, the financial crisis started with their banks. Burt Helms of Inc. magazine has written a thoughtful piece that explains how banks responded to the crisis and the impact that response has had on millions of small-business owners. The article explains how banks abandoned even successful businesses. "By June 2012," Mr. Helms reports, "small-business loans were down $56 billion from their June 2008 peak of $336.4 billion."
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So what has America done to help? The primary outgrowth of the small-business banking crisis has been the explosive growth of the alternative-lending market for small businesses. Last week, Paul Davidson described many of the new programs — like merchant cash advances — that have become the norm for so many owners across the country. The article reported, chillingly, that "small businesses are paying up to 60 percent interest for loans, and they're gritting their teeth but they're happy to get them."
Private industry has rallied around the banking crisis to create new business models and new opportunities. Some of the best technologists and venture capitalists in Silicon Valley are behind these alternative lenders. And prominent banks provide the capital that these companies turn around and lend to small businesses.
What's wrong with this picture? Can you imagine the outrage if well-established corporations were capitalizing on the devastation created by Hurricane Sandy? What would the scenes look like on television if Americans were driving to New Jersey to sell their supplies at a handsome profit instead of giving them away?
Let's set aside the emotional and human toll a small-business owner endures when confronted with choosing between paying 60 percent interest rates or shutting down the business. Let's focus on the economics.
In the wake of the great recession, with the economy still sluggish at best, many of us are living in an incredibly low-interest-rate environment. Banks can borrow money for pretty much nothing. But small businesses cannot. Clearly, something has gone wrong in the delivery of capital. There has to be a more efficient way to get reasonably priced money into the hands of small-business owners.
Alternative Lending Market Grow
On one extreme, banks fight to lend to small-business owners with strong collateral, cash flow and credit at rates as low as 4 percent. On the other extreme, millions of small-business owners are being forced to turn to the alternative lending markets. Wedged in the middle are a smaller percentage of small-business owners who manage to weave through the Small Business Administration process to get a loan.
How can we make access to capital for small-business owners more rational? How can we ensure that more small businesses get to take advantage of the low interest rates?
Here is one suggestion: I think we need to ask what the S.B.A. can learn from the private lenders. These companies — many of them backed by hedge funds and venture capitalists — have come up with an excellent formula to underwrite loans based on bank statements and automatic daily withdrawals from bank accounts. The process is far less arduous than applying for an S.B.A. loan, and it works. It works so well that small businesses can get a cash advance in as few as two days. The only problem is the expense. So here's my question: Is there a way for the S.B.A. and the banks to learn from the alternative lenders and use the same process — preferably with a smaller margin?
What do you think? Can you share other ideas that you think would make access to capital for small-business owners more productive?
Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.