Why America’s prosperity relies on small businesses prospering, too.
by ALFREDO ORTIZ
Entering February means that we are quickly approaching Valentine’s Day – a holiday loved by some and abhorred by others. But just as Valentine’s Day is a time to exchange gifts and well-wishes with loved ones, policymakers should plan on entering into a similar reciprocal relationship with small businesses.
When small businesses are doing well, America is doing well. They are responsible for two-thirds of all new job creation and are the engine of wage growth and community expansion. So by implementing policies that help them, we give a boost to all Americans.
One of the biggest shackles currently attached to our country’s small business entrepreneurs are regulations that dry up their access to financial credit – meaning it’s more difficult to get a bank loan. Without adequate lines of credit, small businesses are not able to expand, and aspiring entrepreneurs are not able to get their businesses off the ground.
Bernie Marcus, the founder of the organization I represent – the Job Creators Network – often tells the story of how it would have been impossible to build his wildly successful hardware retailer, The Home Depot, in today’s business environment. The overregulation and lack of access to credit would have halted operations of the now retail giant before the first tool box or piece of lumber was sold. It’s stories like these that our lawmakers need to hear.
But what is the biggest obstacle standing between aspiring entrepreneurs and sufficient credit lines? It is a set of regulations passed into law in 2010 called the Dodd-Frank Wall Street Reform and Consumer Protection Act. While the bill was supposed to prevent another financial collapse brought on by big Wall Street banks, it ended up harming the small community banks that are the lifeblood of Main Streets and small businesses across the country.
The 2,300-page law levies a number of new regulations onto banks of all sizes. But unlike well-established large banks, small community banks don’t have the resources to hire legions of compliance officers and specialists to tackle the additional mountains of banking regulations. In fact, according to the St. Louis Federal Reserve, banking regulations add $4.5 billion of compliance costs onto small bank ledgers each year. And since the passage of Dodd-Frank, more than 1,700 banks have shut down – accompanied by relatively few new bank formations.
The real kicker for small businesses is that roughly 50 percent of their loan capital originates from these small community banks. Larger financial institutions have a concrete set of criteria used to assess the worthiness of a loan request, which many times does not fit well with small business owners. Instead, many of these entrepreneurs rely on small community banks – which have alternative criteria sets – for vital cash injections. So as small banks disappear and are engulfed by larger ones, small enterprises starve for much needed investment.
Attempts have already been made to right this wrong. For example, Senator John Kennedy introduced legislation last year that would exempt financial institutions with less than $10 billion of assets from the Dodd-Frank regulations. Unfortunately, it didn’t see any movement, but it does create a precedent to curb such harmful regulations going forward.
America relies on small businesses for our prosperity and economic spark. It’s time we return the favor to small businesses and give them the opportunity to do the same. ■
Alfredo Ortiz is the president and CEO of the Job Creators Network.