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.
 
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</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.  
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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. A series of studies conducted by the Harvard Business School 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%. Moreover, businesses with fewer than 50 employees realized 14% losses of employment. A study done by the New York Fed corroborates these findings. The NY Fed study actually adds to them, as well. The researchers in this study also conducted a survey, and 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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Since the recession, small businesses have been notably slower to recover. Especially since 2009, larger businesses have posted higher growth rates in sales, inventories, and fixed assets. Actually, small businesses have seen their fixed asset growth go negative for the first time since 2006. All things considered, slower sales, inventories, and investment culminated in sluggish recovery for small businesses. By extension, banks have been wary of spurious loans, especially to small business, as their credit ratings have been adversely affected in recent years.  
  
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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.  
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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, according to the Mercatus Center at George Mason University. 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. These dramatic decline could be accredited to a few things. Primarily, it appears that many small banks simply cannot compete, and have dropped out of the market. A Mercatus Center report 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, so as to accommodate for higher regulatory costs, search costs, and transaction costs. In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is the most feasible route to maintain solvency in today's credit market.  
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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
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As a result of small banks' overall decline in activity, credit loaning to small businesses has taken a hit.

Revision as of 17:18, 16 March 2016

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. A series of studies conducted by the Harvard Business School 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%. Moreover, businesses with fewer than 50 employees realized 14% losses of employment. A study done by the New York Fed corroborates these findings. The NY Fed study actually adds to them, as well. The researchers in this study also conducted a survey, and found that most small business owners indicated that the lack in sales and commercial activity primarily sparked the decline in employment. Since the recession, small businesses have been notably slower to recover. Especially since 2009, larger businesses have posted higher growth rates in sales, inventories, and fixed assets. Actually, small businesses have seen their fixed asset growth go negative for the first time since 2006. All things considered, slower sales, inventories, and investment culminated in sluggish recovery for small businesses. By extension, banks have been wary of spurious loans, especially to small business, as their credit ratings have been adversely affected in recent years.

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, according to the Mercatus Center at George Mason University. 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. These dramatic decline could be accredited to a few things. Primarily, it appears that many small banks simply cannot compete, and have dropped out of the market. A Mercatus Center report 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, so as to accommodate for higher regulatory costs, search costs, and transaction costs. In a nutshell, it is a difficult time for small banks. Trends indicate that consolidation is the most feasible route to maintain solvency in today's credit market.

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

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