Funding Main Street in Rural America
WASHINGTON—Entrepreneurs in small towns and rural communities throughout the United States face a hard time having access to cash. Despite economic recovery and an improved lending environment, challenges persist, according to lawmakers from both sides of the aisle.
“Access to affordable credit for small and main street businesses remains a persistent challenge,” Sen. Jeanne Shaheen (D-N.H.) said during a small business event at the Bipartisan Policy Center (BPC) on Jan. 30.
Between 2008 and 2016, small business lending decreased 13 percent, while lending to large firms increased 49 percent, said Shaheen, who is also a ranking member of the Senate Small Business and Entrepreneurship Committee.
There are nearly 29 million small businesses in the country that account for two out of every three new private sector jobs. And they produce 16 times more patents per employee than large companies. So the inability of small businesses to access capital prevents the engines of the economy from revving up.
“We lost one small bank or credit union a day over the last seven-eight years,” said Rep. Blaine Luetkemeyer (R-Mo.), vice chairman of the House Small Business Committee.
“As a result, those banks are no longer on Main Street and it makes it difficult for small businesses to be able to have access to capital,” he said at the BPC event.
The primary drivers of this trend have been new rules and regulations and the increasing costs to comply with them.
Over-regulation following the 2008 financial crisis has made it harder for community banks to serve small businesses, and the number of small banks has dropped as a result of consolidation or bank failures.
The community banks are operating under The Dodd-Frank Act, a massive compilation of banking regulations enacted in 2010 by the Obama administration.
The act was designed to prevent a financial crisis like the Great Recession of 2008, by promoting a safer and fairer banking system. But it failed to serve its stated purpose, according to experts. The legislation, which aimed to prevent abusive practices of the major banks, has instead hurt small banks, small businesses, and consumers.
Small banks lost their ability to compete with the larger banks due to increased regulatory demands and capital requirements, making it harder for them to serve their communities profitably.
The higher the capital requirements, the longer it takes for small community banks to receive a return on their investments, Luetkemeyer said.
Although all banks are better capitalized today, experts argue that Dodd-Frank has negatively affected the overall economic environment.
There is still a regulatory overhang that needs to be fixed so that small banks can better serve small businesses in their communities and the overall U.S. economy, according to experts.
There are slightly less than 6,000 banks in the country and 3,000 of them have less than 30 employees, according to Paul Greig, former chairman and CEO of FirstMerit Corporation.
And a small bank with 30 employees is being handed a mountain of paper—over 5,000 pages of regulation, Greig said at the BPC event.
“Peanut butter cannot be spread across a piece of bread evenly,” he said. “Regulation has to be tailored based on the risk, the size, and the complexity of a bank.”
There is also a need for a higher level of venture capital investment throughout the country to support business owners in rural communities and small towns, according to experts.
“It is not just the banks that are gone from Main Street. In the place I grew up everything is gone from Main Street,” said small business owner Eric Dinger at the BPC event.
Dinger grew up in a rural community of 400 people in South Dakota. He is now the CEO and co-founder of Powderhook, a venture-backed startup based in Lincoln, Nebraska. His startup provides information to and connections among hunting and fishing communities.
Funding a business in a place like Lincoln, which is outside of major funding hubs, is a big challenge, he said.
“I have never golfed with a single one of those people. Not one of those people went to church with me,” he said referring to venture capitalists.
“So there was no way of forming a real substantive relationship with those people because they did not live where I live,” he said.
Dinger talked to 87 venture capital firms throughout the country.
In the end, he got lucky and secured venture funding. However, he admits many business ideas in small towns cannot get off the ground, as it takes too long for entrepreneurs to pull the money together that they need to grow their businesses.
Another source of funding for small businesses is online lending.
The online lending industry began to take off after the economic crisis of 2008, when banks dramatically curbed their lending to small businesses. Online lenders offer easy access to capital at higher costs, but they, too, face challenges when it comes to funding businesses in rural areas.
Most of the rural areas don’t have high-speed internet and some parts don’t even have cell phone service, Shaheen said. “So how can we help those small businesses get access to capital?”
The infrastructure plan rolled out by President Donald Trump on Feb. 12 would help. According to the plan, $50 billion in federal funds will be invested in rural infrastructure projects including broadband and electrical power.
Despite challenges in access to capital, small businesses are getting a boost from the Trump administration’s pro-business policies, including tax reform and deregulation. When improvements to infrastructure begin to happen, they will also benefit small businesses.
“With the change in administration, small businesses took a deep breath,” said Luetkemeyer.
According to the National Federation of Independent Business, the small-business optimism index has increased sharply in recent months, reaching one of its highest levels in 45 years.
Although this is still not a good environment to start a new bank, there is rising optimism among community banks as well.
“For the last several months, there have been a lot of new banks and credit unions that have applied for charters. They are in the process of getting them,” said Luetkemeyer.
And the regulators need to get these charters through more quickly, he said.