Too many Americans have been denied the opportunity to turn their ideas into businesses because they lacked the funding required to do so. Between 90% and 95% of entrepreneurs who hire employees require some amount of financing to start their businesses, making capital a critical requirement for new business creation. However, many government programs meant to provide capital to entrepreneurs are biased in favor of established businesses instead of newer businesses. To address the significant and persistent gaps in access to capital, the president should announce a coordinated initiative across the federal government to close such gaps for entrepreneurs everywhere by 2030. In doing so, the president should:
- Instruct the U.S. Treasury Department, Small Business Administration (SBA), and other relevant departments and agencies to make concrete recommendations for how existing capital access programs can be improved to reflect the fact that the age of a business, not its size, is the key factor in job creation, and to direct more support to entrepreneurs launching new businesses.
- Request that Congress make substantial funding available to states for strengthening the private financing of new businesses by expanding capital access through patient capital, innovative investment models and technologies, financing guarantees, user-centered service design, community banking, and other means.
- Form a public-private task force to evaluate the history and current impact of redlining and to recommend actions, including relevant changes to the Community Reinvestment Act, that will counter decades of disinvestment and discrimination. Increased access to capital for entrepreneurs and small businesses should be at the center of how Community Reinvestment Act reform can deploy capital into distressed neighborhoods. The task force should include a cross section of federal agencies, community-based organizations, and representatives from the financial sector.
- Establish clear goals for all federal capital access programs, including the number of new entrepreneurs who access capital (disaggregated by race, gender, socioeconomic class, and geography), revenues generated, new jobs created and sustained, and customer experience feedback.
- Incentivize financial innovation that addresses gaps in capital access by spurring the creation of a new generation of funding models and technologies that serve all types of new businesses, especially those currently underserved by the capital marketplace. Many government funding sources and incentives are limited to small business lending and venture capital funding; other flexible financing mechanisms, such as revenue-based investing and employee ownership models, are worthy of attention.
- Incorporate lessons learned from past and current government programs, including the State Small Business Credit Initiative, SBA loan guaranty programs, and the Small Business Investment Company.
- Evaluate Opportunity Zones to understand the impact of this program to date and to identify reforms to ensure the program better serves new and small businesses, especially those owned by entrepreneurs of color.
- Ask governors and mayors to examine how their state and local entrepreneurial ecosystems can be improved to increase access to capital for all entrepreneurs.
State Small Business Credit Initiative
The State Small Business Credit Initiative (SSBCI) provided $1.5 billion from the U.S. Treasury Department to state programs that promoted private financing for small businesses. Its flexibility allowed states to design programs that addressed their specific needs in a variety of ways. The SSBCI addressed gaps for all types of businesses through both debt and equity financing where traditional forms of capital were too often nonexistent. Between 2011 and 2015, SSBCI programs led to $8.4 billion in new lending, and almost half of the recipients were young businesses (under 5 years old). In addition, 42% of financing went to low- and moderate-income areas. Furthermore, the median capital access program loan size was just $14,800, helping fill funding gaps in regard to small to midsize loans.