Access to Capital

About

Since the Great Recession of the late 2000’s, small business owners have encountered difficulties in getting access to capital. This difficulty has a pervasive effect on small business owners’ ability to not only start, but grow. Small business owners have, when surveyed, indicated that sparse access to capital is the primary threat to small business growth. Slimming credit availability, rising student debt, and ineffective regulation have culminated in an industry-wide decline in access to capital for small business.

Slimming Credit Availability

For over a decade, bank loans have been the most frequent form of financing utilized by small business. In the years following the "Great Recession", however, reasonable bank loans have been tough to come by. It is common knowledge that the recession was caused largely by the collapse of a market supported by risky debt. As such, banks were the focus of heavy regulation. Acts like Dodd-Frank especially impact smaller "community" banks, which commonly finance small business. Moreover, the markets for debt also penalized these banks, as demand for debt-backed securities stagnated, and even began decreasing. Since 2007, Banks have been cautious about the acquisition of new debt. Consequently, loan requirements tightened.

From a regulatory perspective, 2007 provoked a wave of interventionist, discretionary monetary, regulatory, and fiscal policy. Of all the federal regulation adopted in the wake of '07, perhaps the most impactful is the Dodd-Frank Act of 2010. Passed, in part, to tighten the restrictions on the acquisition and sale of risky debt, the DFA established the Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau, CFPB for short, prevents risky mortgage lending and regulates all credit and debit-based agreements. Since its inception, the CFPB has increased compliance regulations and requirements to be met by all commercial banks, regardless of size. These regulations carry formidable costs and alterations to the standard operating procedures for smaller banks. A 2014 Mercatus Center at George Mason University indicated that, across 200 small banks, compliance costs rose at an average of 5%, small banks are especially concerned with the scope of CFPB's power, and 25% of small banks are considering mergers with larger banks, and others are trimming their credit options. These three conclusions indicate a general decline in credit availability from small banks, which provide a large share of small business bank loans. Beyond the regulation's imposed decline in community bank offerings, markets for debt have also become less attractive.

Especially in the years leading up to the mid 2000's financial crash, the Collateralized Debt Obligation (CDO), was the most common debt-backed security being sold by large financial institutions. Effectively, the CDO was a bundle of mortgages that were almost certainly going to be paid. As the market for mortgages (the housing market) stayed afloat and even increased, which was an assumed constant at this time, CDO's would appreciate. A seemingly foolproof plan quickly became extremely spurious, as the demand for CDO's began to outweigh the supply. Once this happened, crediting institutions and investment banks began searching for more mortgages to include in their CDO's. Soon, the pursuit of these mortgages reached the doorsteps of people with poor credit. In other words, there was significant risk in default on these new batch of mortgages. However, institutions pushed these CDO's all the same, and soon began making CDO's of CDO's! Obviously, when the bubble burst, and the housing market collapsed, these institutions (commercial and investment banks) looked unreliable, at the very least. As a result of