Economy & Budget

Small businesses should get the credit they need to lift our economy

National Small Business Week is a time for us to celebrate small business success. It is also a time for us to admit there may not be a more difficult job in America than owning and operating a small business. Meeting payroll for 57 million employees, finding new growth markets and dealing with regulations rank as top challenges for small businesses.

Though not as obvious, accessing capital poses another challenge to small business. We don’t hear about this issue as much because small business is resigned to regarding capital access as just another issue among the many that they face. But capital limitations present an unnecessary cost and hold back small business growth.

{mosads}Many small business owners will talk about “the one that got away” which is code for the project they canceled due to lack of capital. Extreme cases show small businesses putting operations on hold while they wait for a credit line from their bank. The small business credit gap which existed before the Great Recession has actually become worse since then.


With more than 25 million private U.S. companies constituting a $4 trillion credit market and 50 percent of gross domestic product (GDP), there is no doubt that small business investment fuels U.S. economic growth, but this economic engine is sputtering in part due to credit availability. Studies by Harvard Business School, PayNet, and others show lower wages, less business formation, and higher costs for small businesses are consequences of the credit gap.

The U.S. economy is great at creating wealth with world class capital markets for both the largest corporations and personal homeowners. The corporate capital market raised $2.2 trillion for large businesses and the consumer mortgage market raised $1.7 trillion for homeowners, according to the Securities Industry and Financial Markets Association (SIFMA).

Unfortunately, small businesses do not fit neatly into these credit systems. Corporate credit is too expensive and cannot fulfill the small business need for fast approval at low cost. Other sources of credit like the personal mortgage market fail to fill this gap.

The rapid rise of financial technology firms as a new source of credit provides further evidence of the gap. According to the Federal Reserve Board, “fintechs” that use software, data, and analytics to deliver credit faster and with less paperwork have helped to provide about $5 billion in credit to small businesses.

However, expecting financial technology firms to be the panacea for the small business credit gap remains unrealistic. Fintech lenders are part of the emerging small business credit market providing new sources of capital, but many of these businesses are still in the early stage of development and not fully solving this systemic market issue.

Small business, with GDP of $8.5 trillion, deserves its own credit market to make starting and operating a small business easier and to increase the odds of success. The economy has failed to reach 3 percent annual growth for a decade now. The sooner we provide better access to credit for small businesses, the sooner the economy gets back to full growth.

William Phelan is president of PayNet Inc., a small business credit rating firm based in Chicago, and is a member of the U.S. Chamber of Commerce Small Business Council.

The views expressed by contributors are their own and are not the views of The Hill.

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