The Rise of Small Business Credit Innovations


Given their disproportionate contribution to private sector employment, small businesses have been one of the few bright spots in the economy in recent years. However, substantial hurdles continue to exist that prevent them from accessing the credit and capital they need to grow and create even more jobs. In the wake of the Great Recession, traditional sources of credit dried up with banks becoming less inclined to finance small businesses, which often lack collateral and so are considered risky lending options. Government-sponsored lending programs, while beneficial, were difficult to successfully navigate and had a limited reach to the more than 200,000 small businesses that exist in New York City. As a result, for many years, small businesses struggled through the recession with little relief.

While the overall economy has since improved, the small business lending climate continues to be unfavorable. Banks remain very cautious about lending to small firms; at the same time, small business demand for credit to fuel growth has only increased. According to the Federal Reserve Bank of New York’s semi-annual Small Business Credit Survey, 27% of small businesses are now seeking credit to expand, which is up from previous surveys. This mismatch between supply and demand of credit only serves to stunt much-needed economic growth.

Fortunately, this market inefficiency is being addressed by the rise of alternative lending sources including micro-lenders like Grameen America and Kiva, which rely on social accountability to reduce lending risk, as well as innovative platforms like OnDeck Capital and Lending Club, which embrace technology to make lending more efficient and less risky. By offering offer smaller loan sizes and greater flexibility, these alternative lending models are particularly well-suited to the needs of small businesses looking for relatively modest loans under $100,000. Furthermore, expanding the range of credit options to small business spurs more established players to innovate and adapt to the new landscape. This is good news for the small business community.

However, there is significant disconnect between these resources and the small businesses they aim to serve. Because these innovations are relatively new, the broader small business community is largely unaware that they exist. To help address this awareness gap, the Federal Reserve Bank of New York organized a half-day conference on May 15th, which brought together business community leaders about the range of credit options that are available to small and growing businesses. GoBizNYC is proud to support the efforts of the Federal Reserve to promote greater awareness of these innovative resources. To re-live the event, visit http://www.newyorkfed.org/smallbusiness/small-business-summit.html

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