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Why I Joined Fundera: Small Business Lending is Broken and It’s Time to Fix It

Small Businesses Were Hit Hardest During the Financial Crisis of 2008, And Are Still Recovering

During the financial crisis of 2008, America’s small businesses were hit by a perfect storm: declining sales, risk-adverse credit markets, tightening loan standards, and weakened housing and stock market collateral. So it’s no surprise that small firms lost 40 percent more jobs and were slower to recover than larger firms—a trend that, in fact, was foreshadowed in economic studies pointing out that small firms are always hit harder during banking crises because they are more dependent on banks for financing than larger firms.

The good news is that we’ve begun to turn a corner. Due in part to unprecedented steps taken to shore up the financial system and reestablish access to credit, America’s 28 million small businesses have made remarkable progress in recovering from the financial crisis. They’ve created about two out of every three net new jobs since the private sector started adding jobs again in the first quarter of 2010.

I’m proud to say that, while serving as an appointee in the Obama administration—first as a senior aide to the head of the Small Business Administration and, up until just a few months ago, as senior policy advisor in the West Wing of the White House to the National Economic Council Director—I got to play a role in creating policies that helped get America’s small business owners back on their feet. That mission hits close to home, as I grew up working in my family’s small business, and saw just how bruising the recession was for business owners. But, the truth is that the work is not yet done as major roadblocks still stand in the way of America’s entrepreneurs.

Access to Capital Remains a Big Growth Obstacle for Small Businesses

Talk to any small business owner about the biggest obstacles to their growth, and it won’t take long for the conversation to turn to capital access. That’s because lending to small business owners is broken right now. I recently co-authored an independent Harvard Business School working paper that bifurcates the problem, which can be accessed here.***

The first set of challenges shouldn’t surprise anyone considering the unusual depth and duration of the last recession. Let’s be clear: banks are more risk averse today than before the crisis. There’s evidence that bank lending is down about 20 percent since the pre-crisis boom. Terms on small business loans tightened during the crisis, and have loosened much less for small firms than for large firms during the recovery. Even though small business owners have a range of other financing options, about 40 percent reported either getting insufficient capital or rejected outright at the end of 2013.

But, the credit gap in small business lending is bigger than just a ripple effect of the financial crisis of 2008. Just look at the trend in small business lending over the past two decades. In 1995, small business loans constituted over half of all bank loans. Today, that percentage has fallen to less than 30 percent. This secular decline is due to a multitude of factors, including high transaction costs of small business loans and regulators that push banks to hold more capital against business loans than consumer loans, further driving up the costs of small business lending. As a result, it’s increasingly difficult for small businesses to find banks willing to lend to them. One study, for example, noted that the average small business owner has to approach multiple banks and spend about three full days of man hours filling out applications before they can find a bank willing to lend to them.

So, instead of catalyzing the recovery, credit markets are choking off growth and job creation for some small businesses. That’s a dangerous dynamic, and we need to arrest it.

Solutions for the Small Business Credit Gap Aren’t Going to Come from Washington

About a week ago at a brief meeting I had with President Obama, we talked about these challenges, and there is no doubt that he understands the depth of this problem. But, I just don’t think solutions to these problems are going to come from Washington. Right now, making investments in our nation’s future isn’t Capitol Hill’s top priority. Earlier this year, a headline in the Associated Press pretty much summed it up, “WASHINGTON (AP) — Little more than a week after Groundhog Day, the evidence is mounting that lawmakers have all but wrapped up their most consequential work of 2014, at least until the results of the fall elections are known.”

There’s no question that’s lamentable, but inaction in Congress doesn’t have to define or defeat us. The reality is that our country’s economic engine has never really been driven by politicians in Washington; a big part of it is driven by the grit and hustle of entrepreneurs who wake up every day asking, “What are the biggest challenges in the world right now, and how can I build a business to tackle them?”

That’s why I am proud to join a team that is seeking to do just that in the small business lending space.

Fundera Is Transforming Small Business Lending by Creating a Kayak-like Marketplace for Loans

Fundera is a mission-driven startup founded by small business owners for small business owners, and we’re tackling the challenge of capital access for small businesses head on.

We think that business owners often know what’s best for their business, but you’ve got to empower them by democratizing the process so that getting a loan is as fair, transparent and understandable to them as possible. That, in a nutshell, is what we do at Fundera. And, we do it through an online marketplace that creates the choice architecture for small business owners—making it dead simple for small business owners to apply for a loan in under 10 minutes, compare and contrast options among a diverse network of vetted lenders, and choose from a range of products that our lenders offer from short-term loans to SBA loans.

We call our customer success team “advocates” deliberately because they exist to serve the business owner, and only the business owner. Our team walks business owners through each step of the loan process, breaking down the terms and rates so they can compare products on an apples-to-apples basis, highlighting the true cost of every loan, and helping them understand how their choices will affect their business. And, we’re creating best-in-class content to educate business owners on how to manage their finances and graduate to the lowest yielding products possible, meaning more of their capital goes to what it should go to—growing their business. Best of all, the service is free to the small business owner from end-to-end.

Bottom line: Fundera is enabling the Internet to do to small business lending what it’s done to many other industries, from Kayak in the travel industry to Amazon in the retail sector. In the process, we’re opening new doors of capital for small business owners that will help them better manage their cash flow, meet their next order, and hire their next employee. That’s good news for America’s small businesses, and it’s good news up and down the economy, as we believe that putting the wind at the backs of America’s entrepreneurs is pivotal to securing a durable economic recovery.

I couldn’t be prouder of this mission or this team, and I’m excited to get started.

***I left my position at Harvard Business School in June 2014, and the opinions expressed in this blog are entirely my own.

Brayden McCarthy

Brayden McCarthy is Head of Policy & Advocacy at Fundera. He was previously a presidential appointee in the Obama administration, where he served as Senior Policy Advisor in the West Wing Office of the White House National Economic Council and the U.S. Small Business Administration.