Difference between revisions of "Access to Capital"

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=About=
 
=About=
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<onlyinclude>Since the Great Recession of the late 2000’s, [[:Small Business|small business]] owners have encountered difficulties in getting [[:Access to Capital|access to capital]]. This difficulty has a pervasive effect on small business owners’ ability to not only start, but grow. Small business owners have, when surveyed, indicated that sparse access to capital is the primary threat to small business growth. Slimming credit availability, rising student debt, and ineffective regulation have culminated in an industry-wide decline in access to capital for small business.
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<onlyinclude>Since the Great Recession of the late 2000’s, [[:Small Business|small business]] owners have encountered difficulties in getting [[:Access to Capital|access to capital]]. This difficulty has a pervasive effect on small business owners’ ability to not only start, but grow. Small business owners have, when surveyed, indicated that sparse access to capital is the primary threat to their operation. Slimming credit availability, rising student debt, and changing landscape in the loaning market have significantly contributed to an industry-wide decline in access to capital for small business.
 
</onlyinclude>
 
</onlyinclude>
  
 
==Slimming Credit Availability==
 
==Slimming Credit Availability==
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For over a decade, bank loans have been the most frequent form of financing utilized by small business. In the years following the "Great Recession", however, reasonable bank loans have been tough to come by. It is common knowledge that the recession was caused largely by the collapse of a market supported by risky debt. As such, banks were the focus of heavy regulation. Acts like Dodd-Frank especially impact smaller "community" banks, which commonly finance small business. Moreover, the markets for debt also penalized these banks, as demand for debt-backed securities stagnated, and even began decreasing. Since 2007, Banks have been cautious about the acquisition of new debt. Consequently, loan requirements tightened.  
+
In the wake of the recession, the loaning environment to small business has changed. This is a result of a few major factors, both on the loaning side (banks) and the receiving one. Starting with the businesses, small businesses were hit disproportionately hard in the recession.
 +
* Harvard Business School [http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf] showed that small business accounted for 60% for job losses and experienced an 11% decrease in total employment. *This second figure lies almost twice as high as the total loss for large firms, 7%.
 +
*Businesses with fewer than 50 employees realized 14% losses of employment.
 +
*New York Fed [https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf] corroborates these finding, and conducted a survey. They found that most small business owners indicated that the lack in sales and commercial activity primarily sparked the decline in employment.  
  
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From a regulatory perspective, 2007 provoked a wave of interventionist, discretionary monetary, regulatory, and fiscal policy. Of all the federal regulation adopted in the wake of '07, perhaps the most impactful is the Dodd-Frank Act of 2010. Passed, in part, to tighten the restrictions on the acquisition and sale of risky debt, the DFA established the Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau, CFPB for short, prevents risky mortgage lending and regulates all credit and debit-based agreements. Since its inception, the CFPB has increased compliance regulations and requirements to be met by all commercial banks, regardless of size. These regulations carry formidable costs and alterations to the standard operating procedures for smaller banks. A 2014 Mercatus Center at George Mason University indicated that, across 200 small banks, compliance costs rose at an average of 5%, small banks are especially concerned with the scope of CFPB's power, and 25% of small banks are considering mergers with larger banks, and others are trimming their credit options. These three conclusions indicate a general decline in credit availability from small banks, which provide a large share of small business bank loans. Beyond the regulation's imposed decline in community bank offerings, markets for debt have also become less attractive.
+
===Since the Recession===
 +
Since the recession, the NY Fed [https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci17-4.pdf] observed that small businesses have been notably slower to recover than their large counterparts.  
 +
*Especially since 2009, larger businesses have posted higher growth rates in sales, inventories, and fixed assets.  
 +
*Small businesses have seen their fixed asset growth go negative for the first time since 2006.
 +
*Comparatively slower sales, smaller-growing inventories, and declining investment have been observed for small businesses
  
−
Especially in the years leading up to the mid 2000's financial crash, the Collateralized Debt Obligation (CDO), was the most common debt-backed security being sold by large financial institutions. Effectively, the CDO was a bundle of mortgages that were almost certainly going to be paid. As the market for mortgages (the housing market) stayed afloat and even increased, which was an assumed constant at this time, CDO's would appreciate. A seemingly foolproof plan quickly became extremely spurious, as the demand for CDO's began to outweigh the supply. Once this happened, crediting institutions and investment banks began searching for more mortgages to include in their CDO's. Soon, the pursuit of these mortgages reached the doorsteps of people with poor credit. In other words, there was significant risk in default on these new batch of mortgages. However, institutions pushed these CDO's all the same, and soon began making CDO's of CDO's! Obviously, when the bubble burst, and the housing market collapsed, these institutions (commercial and investment banks) looked unreliable, at the very least. As a result of
+
===The State of Small Banks===
 +
Despite the significant credit rating deduction incurred by the recession, small businesses have been able to find loans from alternative sources. Traditionally, smaller banks have catered to small businesses unable to qualify for loans from institutional investors, or bigger banks.
 +
*In 2010, small and community banks accounted for 48.1% of all small business bank loans, Mercatus Center at George Mason University [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435206].
 +
 
 +
Consequently, small businesses have a vested interest in the well-being of their community banks. Unfortunately for small business, these community banks are disappearing at alarming rates.
 +
*Small banks have, since 1993, seen their total numbers fall by almost 50%. In 1993, over 11,000 banks were around. Nowadays, that number is closer to 6,000.
 +
*A Mercatus Center report[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435206] shows that small banks' share of the domestic deposit market fell by 50% (from 40 to 20%) in the last 15 years.
 +
*Meanwhile, the largest 5 banks have "picked up the slack" and acquired a current portion of 39.6%, contrary to their 19% holding in 2001.
 +
* Beyond that, small banks' total assets have been halved since 2000, and don't show signs of improving.  
 +
*Smaller banks with consistently profitable operations have been acquired
 +
 
 +
In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is a bank's most feasible route to maintain solvency in today's credit market.
 +
 
 +
===Overall Credit Loaning to Small Business===
 +
As a result of small banks' overall decline in activity, overall credit loaning to small businesses has taken a hit.
 +
*In 2006, the Wall Street Journal [http://www.wsj.com/articles/big-banks-cut-back-on-small-business-1448586637] indicated that the share of small business financing occupied by banks was 60%. Projections from the Wall Street Journal have the current level pinned at about 40%, but the SBA [https://www.sba.gov/sites/default/files/files/sbl_12study.pdf] claims that the figure is closer to 51%.
 +
 
 +
Regardless of the actual number, it is clear that banks' share of small business finance has fallen at an alarming rate. Why? Well, there is limited quantitative research on this particular field. Instead, researchers have been proposing anecdotal theories to explain the stagnation in bank loaning. In a couple of sentences, large banks do not have a proper and comprehensive system of vetting the qualitative assets (non-balance sheet, credit rating) held by small businesses. Consequently, there is no reliable way to ensure that a small business could be a prudent debtor.
 +
 
 +
Considering that banks can easily make loans to proven, solvent large businesses, there is little justification for making smaller investments in riskier assets. In other words, it is difficult to justify taking an additional risk for a smaller reward. Intuitively speaking, this makes sense.
 +
*The comparative unattractiveness of loaning to small banks is exemplified in a series of surveys conducted by the Harvard Business School [http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf] , Small Business Finance Institute [https://www.sbfi.org/capital-views/cre-lending-outlook/2015-cre-lending-outlook-survey/] [https://www.sbfi.org/capital-views/sba-guaranteed-lending-programs/sba-lending-outlook/2016-sba-lending-outlook/] , and the Kauffman Foundation [http://www.goodjobsfirst.org/sites/default/files/docs/pdf/levelfieldreport.pdf].
 +
 
 +
Small business owners have consistently indicated that they were frustrated with the lack of available credit, and cutthroat competition among their peers to acquire loans; over half of surveyed owners felt that they didn't receive enough funding. Meanwhile, most banks continue to indicate satisfaction with the level of credit being extended to small business. A clear void has formed between banks and their small business debtors, and no evident solution currently exists.
 +
 
 +
== Beyond Bank Loans==
 +
While alternative methods of financing (crowdfunding, online platforms for fundraising, and online term loans) have arisen in the wake of this "credit crunch", they still represent a drop in the bucket. Moreover, these alternative methods are widely unregulated, and are likely to undergo significant changes before they can be deemed as "mainstream" sources of capital generation. In the meantime, small businesses are looking beyond the banking system for a solution.
 +
 
 +
==Related Pages==
 +
[[Carried Interest Debate (Wiki Page)]]
 +
 
 +
[[Category: Internal]]
 +
[[Internal Classification: Legacy| ]]

Latest revision as of 13:49, 6 March 2017

About

Since the Great Recession of the late 2000’s, small business owners have encountered difficulties in getting access to capital. This difficulty has a pervasive effect on small business owners’ ability to not only start, but grow. Small business owners have, when surveyed, indicated that sparse access to capital is the primary threat to their operation. Slimming credit availability, rising student debt, and changing landscape in the loaning market have significantly contributed to an industry-wide decline in access to capital for small business.


Slimming Credit Availability

In the wake of the recession, the loaning environment to small business has changed. This is a result of a few major factors, both on the loaning side (banks) and the receiving one. Starting with the businesses, small businesses were hit disproportionately hard in the recession.

  • Harvard Business School [1] showed that small business accounted for 60% for job losses and experienced an 11% decrease in total employment. *This second figure lies almost twice as high as the total loss for large firms, 7%.
  • Businesses with fewer than 50 employees realized 14% losses of employment.
  • New York Fed [2] corroborates these finding, and conducted a survey. They found that most small business owners indicated that the lack in sales and commercial activity primarily sparked the decline in employment.

Since the Recession

Since the recession, the NY Fed [3] observed that small businesses have been notably slower to recover than their large counterparts.

  • Especially since 2009, larger businesses have posted higher growth rates in sales, inventories, and fixed assets.
  • Small businesses have seen their fixed asset growth go negative for the first time since 2006.
  • Comparatively slower sales, smaller-growing inventories, and declining investment have been observed for small businesses

The State of Small Banks

Despite the significant credit rating deduction incurred by the recession, small businesses have been able to find loans from alternative sources. Traditionally, smaller banks have catered to small businesses unable to qualify for loans from institutional investors, or bigger banks.

  • In 2010, small and community banks accounted for 48.1% of all small business bank loans, Mercatus Center at George Mason University [4].

Consequently, small businesses have a vested interest in the well-being of their community banks. Unfortunately for small business, these community banks are disappearing at alarming rates.

  • Small banks have, since 1993, seen their total numbers fall by almost 50%. In 1993, over 11,000 banks were around. Nowadays, that number is closer to 6,000.
  • A Mercatus Center report[5] shows that small banks' share of the domestic deposit market fell by 50% (from 40 to 20%) in the last 15 years.
  • Meanwhile, the largest 5 banks have "picked up the slack" and acquired a current portion of 39.6%, contrary to their 19% holding in 2001.
  • Beyond that, small banks' total assets have been halved since 2000, and don't show signs of improving.
  • Smaller banks with consistently profitable operations have been acquired

In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is a bank's most feasible route to maintain solvency in today's credit market.

Overall Credit Loaning to Small Business

As a result of small banks' overall decline in activity, overall credit loaning to small businesses has taken a hit.

  • In 2006, the Wall Street Journal [6] indicated that the share of small business financing occupied by banks was 60%. Projections from the Wall Street Journal have the current level pinned at about 40%, but the SBA [7] claims that the figure is closer to 51%.

Regardless of the actual number, it is clear that banks' share of small business finance has fallen at an alarming rate. Why? Well, there is limited quantitative research on this particular field. Instead, researchers have been proposing anecdotal theories to explain the stagnation in bank loaning. In a couple of sentences, large banks do not have a proper and comprehensive system of vetting the qualitative assets (non-balance sheet, credit rating) held by small businesses. Consequently, there is no reliable way to ensure that a small business could be a prudent debtor.

Considering that banks can easily make loans to proven, solvent large businesses, there is little justification for making smaller investments in riskier assets. In other words, it is difficult to justify taking an additional risk for a smaller reward. Intuitively speaking, this makes sense.

  • The comparative unattractiveness of loaning to small banks is exemplified in a series of surveys conducted by the Harvard Business School [8] , Small Business Finance Institute [9] [10] , and the Kauffman Foundation [11].

Small business owners have consistently indicated that they were frustrated with the lack of available credit, and cutthroat competition among their peers to acquire loans; over half of surveyed owners felt that they didn't receive enough funding. Meanwhile, most banks continue to indicate satisfaction with the level of credit being extended to small business. A clear void has formed between banks and their small business debtors, and no evident solution currently exists.

Beyond Bank Loans

While alternative methods of financing (crowdfunding, online platforms for fundraising, and online term loans) have arisen in the wake of this "credit crunch", they still represent a drop in the bucket. Moreover, these alternative methods are widely unregulated, and are likely to undergo significant changes before they can be deemed as "mainstream" sources of capital generation. In the meantime, small businesses are looking beyond the banking system for a solution.

Related Pages

Carried Interest Debate (Wiki Page)

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