America loves entrepreneurs, right? Like Thomas Edison, Henry Ford or Steve Jobs? Think again. It’s incredibly hard for new businesses in this country to get the financing they need to get great ideas off the ground. And unless we act now, Republicans in Congress will make it even even harder.
Since the near-meltdown of the financial system in 2008, banks have consistently given fewer loans to small businesses than they did before the crisis. It doesn’t matter how great your ideas are, or even how well your business is doing.
These are lessons my brother Alan and I learned, fast, when we launched our company, FruitCraft Fermentery and Distillery, in San Diego in 2009.
We make craft spirits and wines, and everyone – even bankers – loved our products when they tasted them. But when we asked for a loan, they all told us “Come back after you’ve been profitable for two years.”
As a result, we scraped by at first. We pooled our savings to raise $12,000 to buy our licenses and found the gear we needed on Craigslist. There must have been sixty times in those early days when we had zero cash. We survived solely through pure grit and our belief that through hard work, you can make something of yourself.
We did survive, and we’re thankful for it. Yet we know our path to success would have been easier and we’d be farther along, adding more to the economy, if we’d only been able to get that first $5,000 loan from a bank.
The Lucky Ones
We’re the lucky ones: our business is growing, and so far we’ve found ways to meet demand. We have loyal customers who come back for more, and through word of mouth, buzz is starting to build. We’ve recently moved into a new, state-of-the art facility. But even with this track record of success, it’s still incredibly hard to get financing, because we’re small.
This situation is even worse for women-owned, and minority-owned businesses and in rural America. Small business lending is still down roughly 20 percent since the financial crisis, and 30 percent of small businesses are unable to even secure a loan. A survey from the Kauffman Firm shows white loan applicants are more than twice as likely to be approved than a minority credit seeker, and rural areas in Appalachia have have business lending rates just 44 percent of the national average.
Ironically, the same banks that refuse to loan to small businesses like FruitCraft are more than happy to bankroll the nontraditional lenders who offer the equivalent of payday loans to small businesses at predatory rates. Why? Because they're unbelievably profitable.
“Merchant cash advances” are unregulated loans offered to small business owners at astronomical interest rates. Why can lenders do this? Because technically, they’re not offering loans, but purchases of future sales revenue. Free from government scrutiny, these companies – which include big national players like PayPal, Kabbage and OnDeck, and lots of smaller, regional players - charge small businesses effective interest rates of up to 350 percent, and add hundreds of dollars in junk fees to every loan.
Big banks know this market is a safe bet, because default rates on merchant cash advances are super low. Why? Because without access to the more reasonable rates traditional banks might offer, small businesses are effectively held hostage.
Nontraditional lenders know this, and their business model relies on small business owners’ desperation: many small businesses like FruitCraft get unsolicited offers of merchant cash advances three or four times a week.
How do merchant cash advances work? We know, because at a critical time in our growth, this was our only access to financing, too. We took out two merchant cash advance loans; these lenders now withdraw $1,000 a day – A DAY - from our accounts. One of these loans, for $120,000, will cost us $180,000 to repay.
Like all small business owners, we care deeply about FruitCraft’s survival: for our own sake, and for our employees and their families. We will do whatever it takes for this to happen. But if we could have gotten a more affordable loan facility, our business would be so much further along by now, and we could be hiring more people.
But like so many small businesses, when we truly needed a loan, we had to accept any terms we could get.
Enter the CFPB
In 2010, to rein in some of the predatory lending practices that led to the Great Recession, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This led to the creation of the Consumer Financial Protection Bureau (CFPB), to give consumers a voice in financial services and hold lenders accountable for predatory practices.
The CFPB is empowered to make banks keep records on their lending. This is critical to improving the system, because without data on where and how loans are granted, it’s difficult for policy makers to understand the full extent of problems faced by small and minority-owned businesses around the country. Without this kind of information, it is hard to develop policies to combat these problems. And in the absence of proof to the contrary, some lawmakers try to deny these problems even exist.
Under the Trump administration, some lawmakers and big banks hope to make the CFPB simply disappear altogether. They’ve lobbied relentlessly for the agency’s director, Richard Cordray, to be replaced by someone who will turn a blind eye to predatory lending, and they’ve want to gut its ability to collect relevant data, just as they are doing at the EPA, OSHA, and the EEOC.
We Need to Act Now
Under Section 1071 of Dodd-Frank, the CFPB recently issued a request for small businesses, banks, and anyone else with knowledge or experience with small businesses to submit reports on their experience.
We only have until September 13 to submit comments to the CFPB about lending to small businesses. Act now to make a difference.
Anyone interested in submitting a comment for the record can participate through Main Street Alliance’s submission guide. If you are a small business owner, you can also submit a comment here. If you are a community member who wants to support small businesses’ access to capital, you can submit a comment here.
Let’s help MSA meet their goal of 3,200 comments to the CFPB by September 13th. Painting a true picture of the challenges faced by small business owners is the first step towards giving everyone a chance at success.