Policy Agenda: Access to Capital

Small Business Majority
Mon, 02/10/2020

Despite the importance of entrepreneurship to our economy, small business owners—particularly women, people of color and other underserved populations—face significant hurdles accessing capital from banks and other traditional sources. According to the Federal Reserve Bank’s 2016 report on minority firms, 40% of firms owned by people of color received the full amount of capital sought, compared to 68% of nonminority-owned firms. Similarly, U.S. Small Business Administration (SBA)loans to women-owned business accounted for only 18% of the total number of SBA 7(a) and 504 loans approved. 

While online and other alternative lending products have sprung up to fill this market need, alternative financing operates in an almost entirely unregulated market-making many small business owners vulnerable to predatory practices. To fully realize the economic potential of small businesses, we must ensure greater access and more options for entrepreneurs to obtain responsible capital by enacting the policy recommendations below.

Promote innovation in small business lending, while ensuring transparency and other responsible practices 

  • Pass legislation extending Truth in Lending Act disclosure requirements to small business loans or credit products, similar to California's small business truth in lending legislation enacted in late 2018.

  • Promote responsible lending practices by lenders and brokers as set forth in the Small Business Borrowers' Bill of Rights. Specifically, promote laws governing business lending that require: (1) transparency around rates and terms, including APR; (2) non-abusive products, including curbs against the practice of “double dripping,” in which borrowers are double-charged fees when they refinance; (3) responsible underwriting; (4) fair treatment from brokers; (5) nondiscrimination; (6) fair debt collection practices and (7) accurate credit reporting.

  • Prohibit "confession of judgment" clauses in small business lending agreements whereby borrowers agree in advance to waive their right to contest any dispute with a lender, often costing them their entire savings. This prohibition has been proposed in the bipartisan Small Business Lending Fairness Act.

  • Support a special charter for fintech companies as proposed by the Office of the Comptroller of the Currency (OCC), but ensure that companies obtaining such a special purpose charter are required to serve the needs of entrepreneurs, especially those in underserved communities.

  • Support the legal requirement that the Consumer Financial Protection Bureau (CFPB) collect small business lending data as mandated under section 1071 of the Dodd-Frank Act. It is important that this requirement is enacted in a way that is not burdensome on community banks.

  • Pass legislation that protects small business owners against predatory debt collectors, especially women and minority-owned businesses who are particularly vulnerable to abusive debt collection practices. Small business owners often use their own capital to finance their business but do not have the same protections consumers do against collectors. 

Increase entrepreneurs' access to traditional sources of capital, particularly in underserved communities

  • Strengthen responsible sources of capital by expanding SBA loan programs such as the 7(a) Loan Guaranty Program, the 504 Loan Guaranty Program and the Microloan Program.

  • Make the SBA’s 7(a) Community Advantage Pilot Program permanent. This program, which is set to expire in 2022, must make a majority of its loans to underserved markets, such as small firms owned by women, entrepreneurs of color and veterans. Making the program permanent would support entrepreneurs that face greater barriers to accessing business loans, ensuring more small businesses have the opportunity to start and grow.

  • Ensure women and entrepreneurs of color get fair access to capital by increasing both funding for and awareness of Women's Business Centers, Small Business Development Centers (SBDCs) and the Minority Business Development Agency. Research shows women and people of color struggle to access credit and gain access to mentoring and networking opportunities. 

  • Maintain and expand lending programs for rural entrepreneurs. The 2018 Farm Bill provided outreach and assistance to socially disadvantaged farmers and proposed funding for such programs, including the Rural Microentrepreneur Assistance Program, Rural Business Development Grants and the Intermediary Relending Program. Lawmakers must work together to continue to pass bipartisan legislation that will give rural entrepreneurs, their families and their communities opportunities to succeed.

  • Establish policies that encourage venture capital investment for startup businesses to include rural cities and towns instead of just metro areas. 

  • Dramatically expand the annual budget of the Community Development Financial Institutions (CDFI) Fund from $250 million to $1 billion. CDFIs are fundamental in breaking down barriers to capital access for small businesses. Expanding the Fund will further increase investment in small firms, especially those in underserved communities.

  • Reaffirm the Community Reinvestment Act's (CRA) mission of stimulating lending in low- and moderate-income areas to ensure business owners in these areas maintain access to capital, and consider additional proposals to improve small business lending. The CRA is an important tool for stimulating small business lending, particularly in low- and moderate-income areas. According to a 2016 FDIC report, 71% of all small business loans originate from a bank subject to CRA reporting requirements. However, the Federal Reserve found that small business lending by CRA respondents dropped by more than half between 2007 and 2010.

  • Establish state banks, such as the Bank of North Dakota, that make low-interest loans for infrastructure, agriculture, affordable housing, student loans and small businesses. These banks will spur economic growth and lead to thriving community banks with higher lending totals. A feasibility study done in Vermont found that a state bank would boost gross domestic product 0.64% and create 2,500 jobs. 
  • Quadruple SBA lending guarantees—for example, by raising the maximum guaranteed annual loan amount from $25 billion to $100 billion—and thereby increasing the volume of small business loans guaranteed by the SBA to $1 trillion over the next decade. This provides small businesses, particularly minority- and women-owned businesses and rural enterprises, with increased opportunities to participate in SBA loan programs and SBDC programs.

Promote expanded use of equity investments for small businesses

  • Facilitate access to equity financing to small businesses within new Opportunity Zones investments. While investments in Opportunity Zones hold the potential to benefit small businesses, especially those in underserved communities, they must be implemented responsibly. This includes requiring reporting metrics that measure program success based on the number of jobs created, where those jobs are located, employee wages and the number of businesses created, particularly businesses formed by women or people of color.

  • Support innovations like equity crowdfunding while ensuring safeguards that make sense for both small business owners and investors. For example, we recommend increasing investment limits for people making less than $150,000 per year. 

  • Allow crowdfunding investors to pool their money together into a fund advised by a registered investment adviser, as proposed in the JOBS and Investor Confidence Act of 2018. This will attract both businesses and prospective investors and boost the crowdfunding market.

  • Engage and mobilize potential angel investors by creating more tax incentives. According to the Securities and Exchange Commission, there are nine million American households that meet the accredited investor criteria, in addition to the already existing 300,000 angel investors. More than half of states offer tax incentives for angel investors. Creating a 5% tax credit for angel investors that invest in businesses with less than $2 million in gross receipts would increase financing for qualifying small businesses, especially those that are traditionally underrepresented.