Small Business Loans in the USA
Small businesses play a major role in America’s economic competitiveness. Not only do they use half of the country’s private sector workforce – about 120 million people, but since 1995 they have created about 2/3 of the net new jobs in the country. Nevertheless, in recent years, small enterprises have been slowly recovering from the crisis and the credit crisis, which particularly struck them. As a result, the question appears whether there is a quick loan able to keep small business facilitites working.
This document compiles and analyzes the current state of access to bank capital for small businesses from the best available sources. We study the cyclical effects of the recession on small businesses and access to credit, as well as a number of structural issues that impede the full recovery of bank credit markets for short-term payday loans.
One of the answers might be a dynamic market for online lenders that use technology to destroy the small business lending market. Although these are small competitors compared to the traditional banking market, these new competitors provide a quick turnaround and online availability for customers, and often use the data to create more accurate loan pricing algorithms. Their presence raises many new questions, including who should regulate these new markets? And what will the players do? Finally, if these innovators are a response to filling the credit gap in small businesses, especially in markets with insufficient levels of service, how can we guarantee that this will not be the next sub-prime lending market?
Small businesses are critical to creating jobs in the US economy.
Small businesses create two of three new jobs. Small firms use half of the private sector workforce. Since 1995, small enterprises have created about two out of three new jobs – 65 % of the total number of jobs created.
Most small businesses are Main Street companies or sole proprietors. Among America’s 28.7 million small businesses, half of all such companies are at home, 23 million are self-employed. The remaining 5.7 million. Small firms have employees and can be divided into Main Street businesses, small and medium-sized suppliers for large corporations and high-performance startups.
During the 2008 financial crisis, small enterprises were hit harder than great companies. They were slower to recover from a recession of unusual depth and duration.
Between 2007 and 2012, the share of small business in the total amount of job losses amounted to about 60%. From the peak of employment to the recession to the last low level in March 2009, jobs in small enterprises decrease by about 11%. In contrast, salaries in large enterprises decrease by about 7%. This discrepancy was even more significant among the smallest small businesses. Jobs rate decreases 14.1% in companies with less than 50 employees, compared with 9.5% in enterprises from 50 to 500 employees, and overall employment declined by 8.4%.
Financial crises tend to run into smaller firms more than great firms. As academic literature emphasizes, small firms always face difficulties during financial crises because they are more dependent on bank capital to finance their growth. Credit markets act as a “financial accelerator” for small firms, so they feel that the credit market is plummeting.
Small businesses have returned to creating two of the three new jobs in the US, but there remains a significant gap in jobs. Small businesses have created jobs in each quarter since 2010 and have returned to creating two of the three new jobs. But, the gap is still present.
Bank credit, in particular for short-term loans, is one of the main sources of external financing for small enterprises, especially companies on Main Street, and is the key to helping small companies maintain cash flow, hire new employees, and purchase new inventory or equipment and business.
Payday loans have historically been important for small businesses. Unlike large firms, small enterprises do not have access to government institutional debt and equity markets, and the perversity of small business profits makes retained earnings an inevitably less stable source of capital. About 48% of business owners report a large bank as their main source of financing, while another 34% report that a regional or community banking institutions or easy payday loans organizations are their main capital financing partner.
Most banks say they are lending to small businesses, but large surveys of small business owners indicate limited credit markets.
5 ways of lending money to small businesses
- Borrowing secured loan from a bank against with subsequent payment of interest is not always a convenient option, since at the initial stage a businessman may not have the necessary security amount.
- Easy payday loans. It is one of the best solution of the financial problems.
- An agreement with an investor who, in exchange for financial support, will receive a share in the business.
- The opportunity to seek help from Small Business Administration – SBA – the largest state organization in the United States, designed to develop the engine of the economy – small business.