Even as their big competitors are awash in capital, many locally owned businesses are struggling to secure the financing they need to grow. A new ILSR analysis has found that, since 2000, bank lending to large businesses is up 36 percent, while small business loan volume has fallen 14 percent and “micro” business loans — those under $100,000 — have plummeted 33 percent.
(The largest corporations do not even need to rely on bank loans, of course, but can finance their growth through the soaring stock and corporate bond markets.)
The problem is not a lack of demand. In our 2014 Independent Business Survey, 42 percent of business owners that needed a loan in the previous two years reported being unable to obtain one. Startups, businesses with fewer than 20 employees, and enterprises owned by minorities and women are having an especially difficult time. Even with the same business characteristics and credit profiles, small businesses owned by African-Americans and Latinos are less likely to be approved for loans, according to one recent study.
One consequence of this credit shortage is that many small businesses are either not adequately capitalized or have been forced to rely on high-cost alternatives, such as credit cards. Both scenarios make them more vulnerable to failing.
The broader consequences for our economy are significant. Studies show locally owned businesses are a primary source of net new job creation, contribute to higher median household incomes, and increase social capital. Yet independent businesses in many sectors are losing market share, while the number of new startups has steadily fallen over the last two decades. Insufficient capital is a key culprit driving these trends.
To shed light on this problem and help inform policy discussions, ILSR has published an overview of the small business lending landscape. Among the key takeaways: