Herald-Tribune (Sarasota, FL)
May 10, 2021
By Frank Knapp Jr.
I recently had the great pleasure of visiting Sarasota as I drove around Florida talking to the media.
In addition to the wonderful weather, the core of the city was vibrant; coffee shops and restaurants were bustling with customers. These and other locally owned small businesses give our communities the life that residents and visitors love.
Unfortunately, not every community in this country enjoys this small business vitality. Today the nation is at a 40-year low in new business startups.ย The concern is great.
In the fall of 2019, before the pandemic, Congress introduced bipartisan legislation that called for researchย to be done to determineย what barriers existedย for entrepreneurs seeking toย startย small businesses. That’s vital to know because economists tell us that all net new jobs in America are created by businesses that are less than 5 years old and have fourย or fewer employees.
The startup problem is particularly a crisis in rural and underserved communities with much higher rates of unemployment than Sarasota Countyโs 4.1%. All of us want our distressed areas to do better economically. It lifts the living standards in these communitiesย and alsoย makes them better contributors to the economic health ofย America as a whole.
Unfortunately, however, government efforts are often overly focusedย on trying to recruit big businesses to locate in distressed areasย โ and those efforts have too often resulted in failure. If we really want to grow our rural and underserved communities, the answer is to help them grow from the bottom up through entrepreneurship.
We do not needย to wait for research to confirm one of the most significant barriers forย entrepreneurs: a lack of access to capital. The traditional way for entrepreneurs to seek startup capitalย is to go to their local banks and ask for loans. But while that method might have worked years ago, it isย simply not getting the job done today.
There are 68% fewer banks in the United States today compared to 1980 due to consolidation and failuresย โ in fact, entrepreneurs in many rural and underserved communities don’tย even have a local bank that they can walk into. But the issue goes beyond the number of banks.
With the average capital needed for a small business startup loan being about $10,000 โ and a micro business only needing about $3,000 on average to start โ these loans simply do not offerย good returns on investment for many banks.
In additionย many banks and credit unions view small business startup loans as too risky. Even if the lender takes advantage of the Small Business Administrationโs 7(a) loan guarantee program, getting back 80% to 90%ย of a failedย small loan is still a loss for the lender in terms of administrative time and money.ย That in turn often leads lenders toย focus on making larger loans to established businesses that are viewed as less risky.
In short, it has become a vicious cycle for many entrepreneurs: Small business startup loans are viewed asย too small for some traditional lenders โ and too risky for others.
But the fact is there are alternative lenders for small businesses.
America has more thanย 570 nonprofit community development financial institutionsย with revolving loan funds to help underserved-community businesses.ย However, only slightly more than 200 of these community development financial institutions do startup loans.
There are also 175 Small Business Administration-certified nonprofit micro lenders across the country. Unfortunately, last year they made on average only 33 loansย from their revolving loan fundsย โย and not all of them were made as startup capital.
And becauseย bothย community development financial institutions and micro lenders use revolving loan funds, they also tend to be risk averse since failed loans reduce the funds they needย to make other loans.
Small business organizations have launched a campaign to tackleย the crisis of theย 40-year low in new business startups.ย One of our recommendations addresses the โtoo small, too riskyโ issue for startup loans.
We recommend that the Small Business Administrationย make direct loans of less than $20,000 for startups and micro businesses from a fund set up by Congress specifically for this purpose. These loans should be largely targeted to rural and underserved communities โ and particularly to entrepreneurs of color and women.
The Small Business Administrationย should contract with community development financial institutions and micro lenders for the management of these loans. It should also be instructed to take much more risk on these small loans and dramatically increase startups where America needs them the most โ in our rural and underserved communities.
Our national campaignย โย โReform the SBA: BIGGER Mission, Authority and Resourcesโย โย has the support of the American Sustainable Business Council, the American Independent Business Alliance, the U.S. Green Chamber of Commerce and state and local business organizations.
Sarasota is blessed with a vibrant small business community. Our goal must be toย foster similar entrepreneurial growth in ourย countyโs neediest areas.
Frank Knapp Jr. is theย CEO of the South Carolina Small Business Chamber of Commerce and a board member of the American Sustainable Business Council. Knapp is also theย campaign coordinator of the โReform the SBA: BIGGER Mission, Authority and Resourcesโ initiative.