The Next L.A. / Reinventing Our Future : THE ECONOMY : IDEA FILE: Small Business Financing
How It Works
Southland bankers and other lenders should rethink how they finance small businesses. Also, local government should boost efforts to encourage entrepreneurship. For the banks, a key step would be to change small-business lending policies that now are dependent on the use of real estate as collateral. Because of the Southland’s depressed real estate market, many small businesses no longer have the option of using property as collateral. That requires more creative lending rules on the part of banks. For government, economic development officials should support “networking” programs to link people who have small-business ideas, such as former aerospace workers, with investors who have money and knowledge to inject into new businesses.
Benefits
Small- and medium-sized businesses create most of the jobs in the economy, nationally and locally. By giving those businesses greater access to capital dramatically improves the potential for job growth in the Southland.
Short- or long-term impact?
It would take several years to see benefits.
Supporters:
Bank of America, for one, says it has successfully de-emphasized real estate-based lending for its small business customers, allowing many borrowers to qualify for loans based on other criteria. Federal bank regulators also have urged banks to accommodate struggling small-business borrowers, especially in the wake of the recent earthquake. Meanwhile, proponents of entrepreneurial networking programs say that government, private or university-sponsored initiatives can provide the bridge to success that many small-business people are searching for. USC is currently developing a program, called L.A. Venture Network, to link entrepreneurs with investors. Some experts say the most effective approach could be local government-sponsored “fairs” that invite entrepreneurs and potential financiers (such as retired executives) to meet.
Opponents
Smaller banks worry that by loosening lending standards, especially for high-risk small-business loans, they will run afoul of government regulators and boost their risk of loss. Also, bank critics say lenders who loosen some collateral rules may simply tighten other aspects of loan qualification. Meanwhile, increased opportunities for networking among entrepreneurs and financiers also creates increased opportunities for swindlers and fast-buck artists.
The costs
For local government and universities, there would be a cost in staff time and use of facilities to promote more entrepreneur-financier links. For banks, higher-than-expected loan losses from any expansion of small-business lending could ultimately raise borrowing costs for other businesses and for consumers.
REALITY METER
Strong likelihood. Market forces are already changing banks’ approach. And networking has great potential, though more facilitation by local government and by universities would help.
