SBA Shuts Down, but Real Small Businesses Aren't Benefiting Anyways

The fact is that the SBA generally targets "large" small businesses -- with full-time accounting staff that can handle all the paperwork and can wait months for a loan.
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There have been stories about the effects of the shutdown on all facets of American life--including small businesses. The Small Business Administration (SBA) shuttered when the government shut down, closing lending programs for business. When loans can't be guaranteed, certainly some businesses are suffering, and most people understand that the shutdown is harming the economy. But, what if the SBA wasn't benefiting what most people think of as small businesses anyways, like local restaurants, stores, gas stations, etc.?

The fact is that the SBA generally targets "large" small businesses -- with full-time accounting staff that can handle all the paperwork and can wait months for a loan. Additionally, the average 2012 SBA-backed loan was more than $337,000 -- far exceeding the relatively modest amounts most mom-and-pop small businesses need for short-term capital needs, like ordering inventory or equipment repairs.

The reality is that banks -- even many regional/community ones -- do not want to issue $50,000 loans; they want larger loans, which are then backed by the SBA in many cases. The disparity between what Americans think of as a small business and what the traditional financial establishment classifies as a small business has not been extensively covered, but it is a painful reality that deeply affects Main Street's ability to contribute to our post-recession recovery.

The recession is certainly to blame for a large chunk of the decrease in small business lending -- but it is not entirely to blame for the general decrease over the past decade. The Federal Reserve Bank of Cleveland wrote this past quarter that "while some measures of small business lending are now above their lowest levels since the economic downturn began, they remain far below their levels before it.... In the fourth quarter of 2012, the value of commercial and industrial loans of less than $1 million... was 78.4 percent of its second-quarter 2007 level, when measured in inflation-adjusted terms." This was despite a proliferation in the number of small businesses during the recovery period.

Banks are generally risk averse when it comes to commercial lending, and have strict borrower parameters, such a requiring businesses to have been stable and profitable for at least the past three years. Thus, younger companies who are profitable and established businesses that had a bad year during the recession are generally out of luck when it comes to dealing either directly with the bank or trying to access an SBA-managed lending program.

The restricted credit environment during the recession led to the surging popularity of alternative lenders for both personal and commercial lending. These lenders include factoring companies, sometimes called merchant cash advances, wherein a borrower might sell its accounts receivable in exchange for a high-interest short-term loan

Competing with these factoring companies is a new generation of online business lending platforms, such as QuarterSpot and IOU Central, which offer lower rates to the best small business borrowers. Online matchmakers such like Lendio are another choice for businesses who are uncertain which lender can meet their specific need.

Along with this evolution in business lending, online platforms like Lending Club and Prosper have also surged in popularity, offering crowdsourced personal loans (called peer-to-peer lending) at rates below credit card averages. Newer platforms like QuarterSpot hold the same promise for small business loans.

Additionally, crowdfunding is now a widely known term, with funds raised worldwide exceeding $2.7 billion in 2012, growing 81 percent that year. Entrepreneurs are increasingly using crowdfunding platforms to pre-sell products in order to fund manufacturing, like Pebble Watch.

I personally became interested in the promise of peer-to-peer business loans after seeing the success of Lending Club and Prosper. Crowdfinance, whether debt or equity based, is filling a void left by traditional lenders, which is creating a lot of economic opportunity. Apparently Google sees it too, as the company led a $125 million deal to invest in Lending Club this summer.

The p2p lending industry has come under some criticism, much of which is expected for an emerging industry still trying to figure some things out. However, those who argue that it is not innovative or disruptive have a somewhat short-sighted view of how things are moving forward. Online lending and other web-based capital-raising mechanisms are not going away, and they can provide as many benefits for borrowers as they do for investors looking to diversify out of the volatile stock market.