By Luc LaHaie, Co-founder and co-CEO of novelty

The Salvation of America’s Small Businesses Lies in Access to Capital

Small businesses are the lifeblood of America, accounting for 44% of national GDP, creating 62% of new jobs, and representing 99.9% of all American businesses. Despite recent government efforts to support entrepreneurs, small businesses are failing to keep up with big business in today’s economic landscape.

Plagued by limited and unaffordable funding, almost all small businesses are undercapitalized. This problem is not new. Created in 1953 to protect the interests of small businesses and encourage competition in the private market, the Small Business Administration (“SBA”) was the government’s solution to an emerging problem: small businesses needed specialized support to access to capital resources that were otherwise readily available. to large companies. Although the SBA allocates funds for small business loans, it is not a direct lender and cannot bear the brunt of small business capital inefficiencies alone. While the SBA leaves banks, credit unions, and other financial institutions clear guidelines for making loans to small businesses, there is no practical method for the SBA or its lenders to underwrite, process, and manage these large-scale loans. .

The 2020 Paycheck Protection Program (“PPP”) has catalyzed a new era of issuance for the SBA, using new channels to disburse $798 billion to small businesses across the United States. This program, although adopted for emergency use, revealed the depth and breadth of the small business market not previously highlighted in traditional SBA loan programs, such as 7(a) loans. In 2021, the SBA approved less than 200 7(a) loans under $25,000, excluding SBA Express. By comparison, the SBA approved 3.2 million PPP loans for businesses of a similar size in 2020 alone.

Although PPP has demonstrated small businesses’ appetite for capital, it has not yet become economically practical for banks and credit unions to issue these loans to small businesses, and therefore, they do not. . Today, 29% of businesses fail due to lack of funding. Banks with the most fiscal and human capital support only part of the market with small business loan approval rates of 14.3%. Until banks provide the time, staff and capital to implement programs to save the issuance of small business loans, entrepreneurs will suffer the consequences of our misaligned financial system.

In the absence of affordable alternatives, small business owners are forced to either avoid loans altogether, despite being a key part of business growth, or settle for high-priced loans that are often easier to obtain. Approval rates for credit cards and merchant cash advances are close to 84%, but the cost of these financing mechanisms forces small business owners to allocate a portion of their loan proceeds to cover the interest on their monthly payments. Using debt to pay for the debt needed to grow a business is significantly less efficient at interest rates over 20% compared to typical single-digit interest rates for large business loans.

As entrepreneurs resort to high-interest loans in the absence of effective alternatives, more than 70% of small businesses are going into debt. For businesses that grow and mature, obtaining lower-cost loans becomes increasingly difficult due to their poor credit scores, which are cited for 36% of loan denials. Subsequently, small business owners often find themselves trapped in a vicious cycle of dependence on high interest loans due to their inability to obtain a cheaper alternative.

The current national labor shortage, estimated at more than 11.3 million vacancies, has exacerbated the damage caused by the inability of small businesses to secure low-cost financing. With limited capital to deploy, small businesses cannot compete with the higher salaries offered by larger companies, which severely hampers their recruiting efforts. Beyond annual compensation, small businesses cannot provide perquisites marked by corporate culture. Small businesses can’t afford break rooms, child care, and well-stocked transportation. With inflation hitting 9.1%, small businesses are also recruiting from an ever-shrinking pool of talent who can afford to ignore extra perks like free meals and snacks.

Retaining talent is just as difficult for small businesses. More than 61% of employees would change jobs to benefit from health insurance. It would be less of a problem for small businesses if the average cost of insurance per employee had not increased by more than 9.6% for small businesses in 2021. For employees who decide to leave small businesses for more large, the cost to a company to replace an employee can range from 50% to 200% of the employee’s annual salary. When a small business re-ignites its job search, it may also fall victim to the flight to safety, revealed by a 2020 Harvard Business School study. In the wake of the COVID-19 pandemic, researchers found that experienced job seekers sought larger, established companies rather than their risky counterparts.

Technology would seem like an obvious solution to small business staffing challenges, but implementing new technology isn’t easy or cheap. The importance of technology investments is repeatedly highlighted in the company’s annual growth targets, as evidenced by JP Morgan Chase’s $12 billion technology spend. To keep pace with the progress of larger competitors, experts recommend that small businesses spend 6.9% of their total revenue on technology. In fact, small businesses are investing closer to 2.6%, which leaves them even further behind their competitors as the world becomes more and more digital. While large companies are implementing artificial intelligence to make their systems smarter and their employees more efficient, smaller companies are struggling to deploy basic technology equipment. 36% of small businesses focus solely on infrastructure, implementing the use of laptops, desktops, servers, phones, and storage. Without the funds to integrate simple technology, the gap will continue to widen between small businesses and their corporate counterparts.

The essential

America is indebted to the ingenuity and tenacity of its countless entrepreneurs. The Small Business Administration’s continued efforts to place capital in the hands of small business owners are to be celebrated, but the SBA still needs the help of financial institutions to accomplish its mission. Enabling equitable access to capital is the only way to ensure equal opportunity across the country to maintain the hope and promise of the American dream.