While startups and small business are often (rightly) hailed as the engines that power growth in the American economy, when it comes time to secure funds — the situation gets tricky. Stated simply, ten years out of the financial crisis and small business lending remains a chronically sluggish and difficult to work in environment.
According to a report by the country’s 12 regional Federal Reserve banks, over half of all startups report difficulty in securing loans and 81 percent report having had to dip into their personal funds to cover gaps in their corporate cash flow. Startups, as defined by the new report, are firms that are less than two years old and employing less than 500 workers.
“Given the importance of startups for the economy, the question of startup capital is of central importance,” according to the 2016 Small Business Credit Survey Report on Startup Firms. “While funding is the lifeblood of every company, capital is especially critical for startups. To reach scale, startups need to be able to secure expansion capital.”
And this is a position that is gaining increasing traction in some segments in Washington.
“It is very difficult to have access to capital and get loans when you really have no collateral against that except your own cash flow,” Linda McMahon, head of the Small Business Administration, told the Senate Committee on Small Business & Entrepreneurship in January. “I know that there are a lot of startups that face those kinds of issues in getting capital.”
The problem, at base is newness — and that startups tend be associated with much higher credit risk (given the staggering numbers of new businesses that fail within…