White Paper on Job Creation and Access to Credit in the United States For Small and Medium-Sized Businesses That Are Rich in Intangible Assets
Andrew J. Sherman
According a survey by BoeFly.com — a lending marketplace that connects small business and commercial borrowers with more than 2,000 banks and lenders nationwide — most small businesses (which are 95 percent of the [Rapid Growth Enterprises] universe) must use personal guarantees to get working capital loans. Although about 60 percent of businesses coming to BoeFly do get credit, the quality of personal guarantees has declined. At least half of BoeFly’s borrowers require SBA loan guarantees, which further require them to have sufficient personal collateral. This reality eliminates many small businesses that would otherwise qualify for loans from a cash flow and receivables standpoint.
The SBA’s use of FICO credit scoring is a major drawback for Rapid Growth Enterprises (RGEs) and unnecessary at a time when alternative, cash- flow-based credit scores are more predictive of a borrower’s ability to pay back a loan. Another variable in small business lending is the repayment schedule. Banks typically make collections once a month and may not know there is a problem with a loan until two to three months after it occurs. As a result, 9 percent of SBA loans result in loan loss workouts. It has been proven that collecting repayment at a greater frequency than monthly can minimize loan loss rates and provide greater insights into the financial health of an RGE. Consider the experience of New York- based On Deck Capital, which has connected thousands of small businesses nationwide to more than $200 million in lending capital. On Deck Capital has been using a daily debit repayment system since 2007. With terms of between three and 18 months, On Deck deducts a fixed amount from its customers every business day. According to On Deck, collecting daily payments directly from a merchant’s business checking account can result in up to a 68 percent reduction in risk relative to bank loans that use traditional collection methods. “If a small business owner runs into an issue, we know that day and can address it accordingly, rather than getting surprised with the problem 60 to 90 days later, which will be more expensive and difficult to put back on track,” explained James Hobson, chief operating officer of On Deck.
The National Federation of Independent Business’s (NFIB) monthly survey of its members recently indicated that the share of small businesses whose borrowing needs were met was two percentage points lower in January 2011 than in June 2009. The employment component of the survey showed that a net of 3 percent of business owners plan to create new jobs over the next three months, down from a 2011 high in August of 5 percent. As NFIB points out, this is well below the double-digit readings typically displayed during expansions. Yet small business led the job growth and large companies shed workers, according to payroll company ADP. This is not a new trend. Since 2001, employment at small firms has grown by 6.5 percent, or just shy of 50 million workers, and medium and large firms’ employment has declined. In fact, large firms now employ 17.5 million workers, down from nearly 21 million a decade ago, according to ADP. With large companies not driving job gains, the United States desperately needs its RGEs to keep growing and hiring. Ken Yancey, CEO of SCORE, a national nonprofit association dedicated to helping small businesses grow, comments: “Access to capital and access to debt are critical for small and growing businesses if they are to live up to the expectations placed on them as job creators. Logical and efficient steps must be taken by both the public and private sector to ensure an environment where worthy companies can get the funding they need and where there is a level of economic certainty.”
Read the full White Paper at TechAmerica Foundation