Small businesses are in crisis — here’s how Isabel Guzman can make a difference as SBA chief
President-elect Joe Biden has nominated Isabel Guzman to lead the Small Business Administration at a time when the stakes are the highest they have ever been for the person sitting in the administrator’s chair. Guzman is certainly up for the task of leading the organization at a time of great need.
More than two million, or 15 percent, of the nation’s small businesses have closed due to COVID-19. Because of longstanding biases in our financial system that leave them undercapitalized and under resourced, businesses owned by people of color bore the brunt of the pain. More than 26 percent of Black, 19 percent of Latinx, and 21 percent of Asian-owned businesses closed, according to research by the Federal Reserve Bank of New York, and the wealth of innumerable hard-working families has evaporated.
Small businesses must become a central focus for federal policymakers working on our economic recovery. The troubled launch and execution of the Paycheck Protection Program, our nation’s primary effort to support small businesses during the pandemic, clearly shows we have a long way to go. Our shortcomings in creating an equitable recovery have illuminated — and exacerbated — the longstanding inequality in our small business credit markets but there are steps Guzman and other leaders can take to spark a strong and inclusive recovery for all Main Street entrepreneurs. For starters, establishing a strong partnership between Treasury, the SBA and Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs), will be critical to ensure federal funding reaches the small businesses that need it the most.
Small businesses need bold, immediate action
It’s clear that, without major federal interventions, whole swathes of the small business sector will never return. These challenges open a window of opportunity for significant and overdue reform. I recently joined a group of leading executives, former federal officials, and public policy experts to release a five-step plan for creating a more inclusive, dynamic, and productive small business sector. The SBA will be critical for executing on this plan, but to do so it must be modernized and supported with new investments.
Three novel ideas included in the paper specifically address some of our longstanding challenges:
- Federally backed debt and equity: Entrepreneurs of color struggle to access credit because they are more likely to have had personal credit challenges or no credit, lack traditional documentation, do not have assets for collateral, and are less likely to have social and business ties to bankers. Meanwhile, the consolidation of the banking sector has dramatically reduced the number of community banks that invest a significantly higher percentage of their assets in small business loans and are more likely to lend on a holistic basis.
We can address this challenge by creating a new generation of federally backed debt and equity products that meet diverse market demands. For example, a federally backed, first-loss guarantee loan program for innovative and responsible fintech lenders, Community Development Financial Institutions like Opportunity Fund, and Minority Depository Institutions could help disadvantaged entrepreneurs access federally subsidized loans that meet their unique needs, without onerous paperwork.
- New private sector ESG standards for procurement: Procurement, or the process of sourcing the goods and services a company needs to fulfill its business model, also offers a huge opportunity to support small businesses in low-income areas and those owned by women or people of color. Today, the federal government, a small set of Fortune 500 companies, and a handful of states account for the large majority of procurement from disadvantaged small businesses. But the collective spend of these entities is but a small share of total public and private procurement in the United States.
We propose a new set of private sector Environmental, Social and Governance (ESG) standards for procurement from disadvantaged business owners, around which the private sector could mobilize to bring the benefits of contracting set-asides to a broader market.
- Creating a new federal Small Business Ecosystem Demonstration Project: New, untried federal programs could help reverse declines in small business formation, job creation, and the underrepresentation of minority business owners — but we must test programs to figure out what works. A new federal Small Business Ecosystem Demonstration Project could catalyze and evaluate ways of driving transformative outcomes for small businesses across the country.
As we recover from this crisis, our aim shouldn’t just be to rebuild Main Street exactly the way it was — our aim should be to rebuild it better. Our small business support systems and credit markets were failing small business owners, but we have an unprecedented chance to reform them now. I look forward to working with Isabel Guzman and the good men and women of the SBA to put fresh ideas into play to rebuild our Main Streets better and unleash a new era of opportunity and innovation that will reflect the spirit, value, and tenacity our nation’s entrepreneurs have demonstrated through this truly difficult time.
Luz Urrutia is the CEO of Accion Opportunity Fund, a community development financial institution and a leading nonprofit small business lender.
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