Why Can’t Small Businesses Get the Money?

I’ve written a few posts about the current availability of borrowed capital for small businesses, mostly from the perspective of the U.S. Small Business Administration and lenders. The SBA has recently created new loan programs, improved the terms of existing programs, and taken other steps to increase the rate and volume of small business lending. Lenders claim they have money and are eager to lend it out.

So, why do small business owners and leaders report that money is hard to come by? My evidence for this statement is purely anecdotal, but I believe it is true. And I believe the answer might be fairly simple (though I’m hoping readers will set me straight if I’m wrong): the conditions for obtaining a loan are simply too onerous for many people who might otherwise borrow to start a business. What are the two main conditions that stand as stumbling blocks? Credit scores and collateral. (One other obstacle may be that the size of loans offered is too large for those who want to start small–a subject for another day.)

Let’s ignore the collateral issue for now (see comments from Dr. Bornstein below for more insight), and focus on credit. I’ll say right now that I think credit scoring provides a useful function in society; it enables those of us who might want to lend money the means to determine the probability that we’ll be paid back. In theory, this type of ranking should benefit both the borrower and lender. However, in reality I’m not sure that the system is working on behalf of the borrower.

What’s the difference between a FICO score of 645 and 655? One late payment? A bounced check? Who knows, but it could be the difference between getting a small business loan and not, or getting a 9% interest rate versus a 12% rate. Who decides where to draw that line?

Are historically underserved populations (not synonymous with “minority,” but probably a nicer way of saying “poor”) unfairly punished on current credit scoring mechanisms by some inherent bias in the system? As has been shown in studies of educational testing bias, the statistics and criteria used to create the scoring system may naturally favor certain segments of the population. To get a sense of the mystery and confusion surrounding credit scores, check this out.

During my training as a real estate agent, I was repeatedly warned not to engage in any behavior or speech that might imply I was “steering” clients away from (or toward) certain areas or neighborhoods based on that locale’s racial makeup. A violation can result in a staggering fine from the federal government, and likely a suspended license from the state agency that governs real estate.

Do the current credit scoring formulas penalize certain cultural characteristics, in effect “steering” lenders away from those who need business loans the most?

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