Policy Agenda: Access to Capital
Despite the importance of entrepreneurship to our economy, small business owners—particularly women, people of color and other underserved populations—face significant hurdles accessing capital from banks and other traditional sources. According to the Federal Reserve Bank’s 2016 report on minority firms, 40% of firms owned by people of color received the full amount of capital sought, compared to 68% of nonminority-owned firms. Similarly, U.S. Small Business Administration (SBA)loans to women-owned business accounted for only 18% of the total number of SBA 7(a) and 504 loans approved.
While online and other alternative lending products have sprung up to fill this market need, alternative financing operates in an almost entirely unregulated market-making many small business owners vulnerable to predatory practices. To fully realize the economic potential of small businesses, we must ensure greater access and more options for entrepreneurs to obtain responsible capital by enacting the policy recommendations below.
Promote innovation in small business lending, while ensuring transparency and other responsible practices
- Pass legislation extending Truth in Lending Act disclosure requirements to small business loans or credit products, such as California's small business truth in lending legislation enacted in 2018.
- Promote responsible lending practices by lenders and brokers as set forth in the Small Business Borrowers' Bill of Rights. Specifically, promote laws and industry practices governing business lending to require: (1) transparency around rates and terms, including APR, (2) non-abusive products, including curbs against the practice of "double dipping," in which borrowers are double-charged fees when they refinance, (3) responsible underwriting, (4) fair treatment from brokers, (5) nondiscrimination, (6) fair debt collection practices and (7) accurate credit reporting.
- Prohibit "confession of judgment" clauses in small business lending agreements whereby borrowers agree in advance to waive their right to contest any dispute with a lender, often costing them their entire savings. This prohibition has been proposed in the bipartisan Small Business Lending Fairness Act.
Increase entrepreneurs' access to traditional sources of capital, particularly in underserved communities
- Strengthen responsible sources of capital by expanding SBA loan programs such as the 7(a) Loan Guaranty Program, the 504 Loan Guaranty Program and the Microloan Program.
- Make the SBA’s 7(a) Community Advantage Pilot Program permanent. This program, which is set to expire in 2022, must make a majority of its loans to underserved markets, such as small firms owned by women, entrepreneurs of color and veterans. Making the program permanent would support entrepreneurs that face greater barriers to accessing business loans, ensuring more small businesses have the opportunity to start and grow.
- Ensure women and entrepreneurs of color get fair access to capital by increasing both funding for Women's Business Development Centers, Small Business Development Centers and the Minority Business Development Agency.
- Maintain and expand lending programs for rural entrepreneurs funded through the U.S. Department of Agriculture, including the Rural Microentrepreneur Assistance Program, Rural Business Development Grants and the Intermediary Relending Program.
- Dramatically expand the annual budget of the Community Development Financial Institutions (CDFI) Fund from $250 million to $1 billion.
Promote expanded use of equity investments for small businesses
- Facilitate access to equity financing that directly benefits small businesses within the recently-created Opportunity Zones. This includes requiring reporting metrics that measure program success based on the number of jobs created, where those jobs are located and the number of businesses created, particularly businesses formed by women or people of color.
- Support innovations like equity crowdfunding while ensuring safeguards that make sense for both small business owners and investors. For example, we recommend increasing investment limits for people making less than $150,000 per year. Additionally, we recommend allowing crowdfunding investors to pool their money together into a fund advised by a registered investment adviser, as proposed in the JOBS and Investor Confidence Act.