What Small Business really needs – and from whom
Written by Michael Lewis on December 2, 2015
Big Business doesn’t seem to have a clue about Small Business.
We just got an e-mail that American Express had proclaimed Small Business Saturday “in response to small business owners’ most pressing need: getting more customers during the busy holiday shopping season.”
Maybe that’s the most pressing need from the perspective of the guys who issue credit cards that cost Small Business the highest transaction fees, about 3.5%, but if you ask Small Business owners about their most pressing need, adding holiday customers will definitely not be it.
In multiple surveys of Small Business needs, in fact, adding holiday shoppers didn’t appear. What was near the top of every list, however, was access to financing. A business that can’t borrow is a business in peril.
That’s why a Wall Street Journal report Friday was of such concern. To quote the paper, “the biggest banks in the US are making far fewer loans to small businesses than they did a decade ago, ceding market share to alternative lenders that charge significantly higher rates.”
That means that a Small Business, already at a disadvantage to the big boys, also pays far more to borrow, increasing its costs relative to far larger competitors.
The big banks explain that a $100,000 loan doesn’t make economic sense when they can lend $1 million at the same administrative cost. So, the paper reported, the 10 largest banks last year loaned 38% less money to Small Business than they did in 2006.
That might make sense to the big banks today, but you can question the long-term wisdom of writing off Small Business from the banks’ own perspective, much less the nation’s, since more than 53% of all jobs are in small businesses.
Take a lesson from history why banks shouldn’t put all their eggs in the big basket and expect to prosper in the long run.
During World War II, paper was rationed, as were most commodities. But newspapers were so important in holding communities together that the government decided that every newspaper had to get a supply, however meager, to use as it saw fit.
In Miami all the large advertisers had relied on the Miami News, so that paper allocated a page to each of the dozen biggest, freezing out small businesses that needed advertising as their lifeline. The far smaller Miami Herald didn’t have big advertisers, so it split up its limited ad space, guaranteeing all local businesses a bit.
After the war, the dozen top advertisers remained in the News, but in the post-war boom the many small businesses that had been in the Herald stayed there and grew and grew – until the Herald became the larger and more prosperous paper.
Could big banks be making the same mistake of relying only on big guys? The facts suggest that it’s possible.
Without trying to define Small Business exactly – it takes the US Small Business Administration five pages to do it, with different worker and sales numbers as the top limit for each industry – the rough standard is fewer than 500 workers.
By that standard, 99.56% of all US businesses are Small Business, so banks are targeting less than one-half percent of all businesses to make loans. If we define Small Business as fewer than 250 employees, then big banks are missing only 99.09% of all businesses.
By skipping over those Small Business customers, big banks are also missing the segment that is actually growing jobs, not losing them, while propping up a declining category.
In the first quarter of 2015, according to the US Bureau of Labor Statistics, the nation added just 238,000 net jobs. Of nine business sizes, the bureau found that only the largest – those with 1,000-plus workers – actually had a net job loss, losing 72,000. The rest of all US businesses – the small and midsize – totaled a 310,000-job gain.
Miami’s economy relies on Small Business growth. In choking credit, we slow growth. Meanwhile, the big banks funnel lending to the one group that is contracting – the biggest businesses. Are we, like the Miami News, putting more and more eggs in the wrong basket?
Some of big banks’ decision-making as to where to lend is driven by regulations that have grown far more stringent, ostensibly to protect us. It costs less paperwork per dollar the larger the loan gets, and banks are buried in federal regulations. We sympathize.
But at the point regulations choke off credit to the sector that not only needs funds most but actually uses them to add jobs and Gross Domestic Product far faster than the largest businesses that are already mature and less likely to grow, it’s time to retool the regulations.
Perhaps we could tier businesses, with smaller businesses forced to jump through fewer hoops for smaller loans, thus making it less costly for big banks to serve them. Alternatively, regulators could provide “bonuses” of less paperwork overall for banks that serve more small clients. But as of now, regulations deter job growth.
Maybe it’s not just Big Business that doesn’t understand Small Business needs. Maybe Big Government doesn’t either.