It’s only been 10 days since the CARES Act released $2 trillion into the American economy for families and businesses. The US Treasury and Small Business Administration are naturally having some challenges scaling up the largest emergency business loan program in American history. But we must have faith that the SBA and its network of private sector banks and lenders will begin efficiently processing more and more loans very soon.
According to SBA leaders who served under both President Bush and President Obama, the SBA has nearly 14 years of experience preparing for such a crisis, and a senior leadership team consisting of career officials and experienced administrators who came of age during the agency’s first Emergency Disaster Loan program after Hurricane Katrina in 2006 and continuing it through the Great Recession of 2008-2009.
But rolling out the CARES Act will not be enough. Economists and policy makers agree that the federal government will need another 1-3 mammoth interventions to steady the American economy through the COVID-19 crisis. We will need more capital, borrower flexibility, partnerships beyond traditional banks and better use of the emerging entrepreneurial ecosystems in cities and states across America.
The SBA already provides over $28 billion annually in loans, guarantees and direct support to small businesses, defined as those with less than 500 employees. It channels its lending and guarantees through several thousand established banks in the United States. While the CARES Act requires the agency to scale up its programs overnight by a factor of 10, the infrastructure to do so is already there.
“SBA disaster recovery loans are among the most efficient and patient form of capital for entrepreneurs managing through a crisis,” said Anoop Prakash, former Associate Administrator of Entrepreneurial Development, who was part of the team brought into the SBA by President Bush after Hurricane Katrina to streamline SBA operations. “I am encouraged by the fact current SBA leaders are agency veterans who lived through Katrina and the 2008 recession, including Administrator Carranza, and with the support of the Administration, are well equipped to expedite loans and minimize bureaucracy in these challenging times.”
The current small business lending infrastructure may be sufficient to implement the CARES Act, but the global economy in 2020 has new players to account for. More Americans are working for small businesses and as independent free lancers than ever before. According to a recent brief by the Center for American Progress, “nearly 60 million Americans—more than 47 percent of workers—work for a business with fewer than 500 hundred employees. Nearly one-quarter of these businesses are in accommodation, food services, and retail trade—sectors where layoffs are growing due to lower demand and jobs are usually low wage and cannot be done remotely. In addition, according to UpWork and the Freelancers Union, nearly 57 million Americans are self-employed.
Karen Mills, who served as SBA Administrator in the Obama Administration from 2009-2013, and author of Fintech, Small Business & the American Dream: How Technology Is Transforming Lending and Shaping a New Era of Small Business Opportunity, reminds us that the vast majority of America’s 30 million small businesses are very small, with only a few employees. And a growing number of these small businesses don’t use traditional banks as their only financial institution. Mills points out that PayPal has over 10 million small business customers. And fintech giants like Square, Stripe and Intuit have millions more.
Mercedes Delgado and Karen G. Mills, “A New Categorization of the U.S. Economy: The Role of Supply … [+]
Figure 2.2 Small Businesses by Number of Firms in the United States (Millions)
US Treasury Secretary Steve Mnuchin hinted on April 1 that fintech will be authorized to make SBA loans, stating, “Let me just be clear, this is not just normal SBA lenders, any FDIC bank, any credit union, any fintech lender will be authorized to make these loans, subject to certain approvals.” Right now, most fintech lenders don’t have systems in place to directly service SBA loans, and it will be difficult to stand those up in the short term. But many do have partnerships with traditional banks that they are exploring as a way to connect their borrowers and customers to SBA programs.
There are mission-driven community development financial institutions (CDFIs) that often serve minority communities, rural America, and other specialized borrower communities. The State Small Business Credit Initiative was a Treasury Department program created after the 2008 financial crisis that flexibly supported state small-business lending programs. Both are examples of non-bank institutions that the Center for American Progress believes can provide critical capital to American small businesses.
In 2018, the Congressional Research Service released an analysis on private-sector job creation in the United States for the Small Business Administration. CRS found that the startups creating the most jobs are those “having sales that have doubled over the most recent four-year period and have an employment growth quantifier of two of more over the same time period”. While high-impact startups account for only 5-6% of all businesses with employees, they seem to account for “almost all [net] job creation in the economy”. In addition, these high impact startups exist in all regions and states, although they tend to be close to urban centers, and are relatively evenly distributed across all industries – regardless of the vibrancy of the industry they are in. Large companies with over 500 employees have only accounted for about 30% of American job gains since 2011.
It follows then, that in addition to expanding access to capital and the number of financial institutions through which that capital can flow, we need to better utilize the emerging entrepreneurial ecosystems developing across America. Over the last decade, cities, states and regions have been transforming their economic development strategies to emphasize local entrepreneurship, university partnerships and local small business support. They have invested in Small Business Development Centers, micro-lenders, co-working spaces, startup accelerators and commercialization programs.
These ecosystems are immature and underutilized by small business as a source for training, mentorship, business development, access to accounting, legal and other professional services, networking and technical support. Former SBA Administrator Mills believes that these ecosystems, combined with new money and local flexibility to experiment, are going to be key to growing our SME sector and creating more “high-impact” startups. She supports recent legislation proposed by Senator Amy Klobuchar to seed innovation-driven startups outside the East and West Coasts.
This week should see SBA loan processing becoming efficient, Secretary Mnuchin clarifying important questions about affiliation and loss process for banks, and rapid innovation to treat COVID-19 continuing by America’s researchers. There is a lot to be proud of, and a lot to plan for.