Working on Solving 4% by Ann Sullivan
Tuesday, April 7, 2015
WIPP Works in Washington
Working on Solving 4%
By Ann Sullivan, WIPP Government Relations
It is no secret that women-owned businesses across the board have struggled with one thing: accessing capital. The 2008 and 2009 disruption of capital markets and the tightening of private lending have increased awareness on Capitol Hill that small businesses are in need of greater access to capital in the private and public sector. A disturbing statistic found in the Senate report on women entrepreneurs last year says that only 4% of all commercial small business lending is given to women. Why is that so low and how can we fix it? The WIPP government relations team, which I head, decided to do a deep dive into that possible solutions to the lethargic deployment of capital to women-owned businesses.
As small business lending still remains below pre-recession levels, access to capital is important for all aspects of running a business: maintaining cash flow, scaling up to accommodate new contracts, hiring new employees, purchasing new equipment and real estate, and dealing with the lag time between invoicing and receiving payment. How about companies that are experiencing rapid growth? Without capital investment, it just won’t happen.
The first order of business is to take a look at all forms of capital and understanding what each segment says it needs. Banks come in all shapes and sizes, each with different approaches to small business lending. The list is pretty comprehensive—angel investing, crowdfunding, and venture capital to name a few.
On the public side, the Small Business Administration’s (SBA) lending programs have had a blockbuster year, providing over $10 billion in loans to small businesses through its 7(a) Small Loans and CDC/504 Loan programs alone. To recap, the following are lending programs that the SBA offers, which we are looking into as we evaluate how to advance small business capital access efforts: The Community Advantage program, the 7(a) Small Loans program, the Microloan program, the CDC/504 Loan program, and the Small Business Investment Company (SBIC) program.
Although not typically thought of as a capital access program, the SBA’s 8(a) Mentor-Protégé program provides opportunities for small businesses to increase their capital access potential. The program allows older and more established companies to mentor start-ups and smaller companies by providing technical and financial assistance in the form of training, business development efforts, and equity investments and/or loans. The SBA expects to expand this program, hoping to create a second Mentor-Protégé program that is open to all small businesses (i.e., HUBZone, service-disabled veteran-owned, women-owned, and economically-disadvantaged women-owned).
Our research so far shows that there is a market for new forms of small business lending. For example, there has been a boost of angel investors that provide capital for business start-ups, oftentimes in exchange for convertible debt or equity. Another new lending method is crowdfunding, a form of online lending backed by institutional or individual investors. The Securities and Exchange Commission (SEC) has proposed new crowdfunding rules to regulate registered funding portals and brokers that issuers are required to use as intermediaries in the offer and sale of securities. Such an effort is intended to serve as a vehicle to prevent fraud, ideally making crowdfunding a more secure form of investment. The SEC’s crowdfunding rules are yet to be finalized, leaving those involved in crowdfunding efforts eagerly waiting for guidelines.
We have also found that small banks need relief from compliance regulations under Dodd-Frank, and credit unions are bumping up against their lending caps for small business loans. If those lending caps were raised (and only Congress can do it), additional capital would be deployed to small firms. In addition, angel investors, given additional tax incentives, would free up more capital, while women-owned businesses have historically had more limited access to private venture capital. As a result, implementing measures to fill in these gaps is crucial in generating more robust capital access for small businesses.
Through established programs and innovative business lending, it is clear that the federal government and investors alike see the need to increase small business access to capital, yet small businesses are still struggling. So figuring out the puzzle will take some time. If we can find components that need help by Congressional action, then maybe we will have the makings of a legislative package, which enacted could turn some of the rhetoric into action.
Everyone wants women owned businesses to succeed. Getting a good handle on why commercial lending is at 4% is a start. You can help. Send us your comments and experiences with securing capital for your business. Our team in Washington could sure use your input as we continue to unravel this mystery.