Former Small Business Administration chief Karen Mills, now a senior fellow at Harvard Business School, is concerned that small business are still struggling and the credit gap is widening.
Mills, in a just-released Harvard Business School Paper on small business lending, entitled The State of Small Business Lending: Credit Access During the Recovery and How Technology May Change the Game, paints a bleak picture of the lending environment critical to the growth of small businesses since the recession.
However, Mills does offer some hope and notes the emerging, dynamic market of online lenders that are using technology to help fill the small business credit gap in underserved markets. But she cautions, these innovators raise other issues like, who should regulate these markets and how to guard against these online lenders becoming the next subprime market.
Here are some key findings from Mills’ Working Paper:
- Between 2007 and 2012, the small business share of total net job losses was about 60 percent. From the employment peak before the recession until the last low point in March 2009, jobs at small firms fell about 11 percent.
- By contrast, payrolls at larger businesses shrank by about 7 percent. Jobs declined 14.1 percent in establishments with fewer than 50 employees, compared with 9.5 percent in businesses with 50 to 500 employees, while overall employment decreased 8.4 percent.
- During the 2008 financial crisis, small businesses were less able to secure bank credit because of a ‘perfect’ storm of falling sales, weakened collateral and risk aversion among lenders. There are some lingering cyclical factors from the crisis that may still be constraining access to bank credit.
- There also appear to be structural barriers impeding bank lending to small businesses, including consolidation of the banking industry, high search costs and higher transaction costs associated with small business lending.
- Small businesses are back to creating two out of every three net new jobs in the U.S., but there remains a significant jobs gap.
- The data on the small business credit gap is limited and inconclusive, but raises troubling signs that access to bank credit for small businesses was in steady decline prior to the crisis, was hit hard during the crisis and has continued to decline in the recovery as banks focus on more profitable market segments.
Read the entire Working Paper HERE.
