(Photo Credit: Lens Envy/Flickr)
We know what the problem is. The traditional financial markets that have historically served local, small businesses are consolidating. The combination of the 2008 recession and follow-on Federal regulations has thinned the herd of active community banks. This coupled with the proliferation of on-line lending platforms has disrupted how businesses access credit and whether that credit is priced properly and fits the needs of the borrower.
Herein is a critical problem—accessibility to credit is not the same thing as having credit on terms and conditions that allow healthy business growth and debt repayment at a reasonable cost. The jury is still out on these on-line financial “innovations.”
The real challenge is how do we harness Community Development Financial Institutions (CDFIs) to fill the gaps? CDFIs are certified by the State and Federal government. The Summit Capital Action Team‘s plan for 2015 (proposed actions below) is looking to create a business model that provides scale and reach without sacrificing the CDFIs mission. CDFIs are created to provide financial products services to underserved areas and people.
So figuring out how to fill these needs with living, breathing intermediaries (without then becoming a faceless, numbers-driven financial institutions) is the key to successfully executing on the Capital Action Team plan. Finance is the life blood of our society and to our economy. There has to be ways to weed out the predators while creating systems that serve the legitimate needs of borrowers in a responsible way. To do so will re-establish trust in the system for the small business borrower.
I was raised by small business owners—Mom running a clothing store, with Dad working as an electrician while they were raising 5 kids and operating a small chicken ranch on the side. So for me, this was the life I had growing up. Back then we didn’t have technical terms like “entrepreneur” or “micro-enterprise”—people just found ways to make a living, raise their family, and contribute to their community. I remember that family and community bankers were the principal “financiers” of the business ventures back then. So much emphasis was placed on character and knowing who you were lending to—in a small community you didn’t borrower what you couldn’t pay back, because you had to face these same people who helped you. I know this is old school, but it’s the way I was raised and, oh by the way, it worked!
The region my organization, 3CORE, serves is largely made up of small businesses and self-employed people. According to the Small Business Administration (SBA), California has 3.57 million businesses. Of these, about 684,000 companies have employees while 2.88 million businesses have no employees or about 81 percent of total businesses. In our region, roughly 75 percent of businesses have 5 or fewer employees or who are self-employed. So access to reasonably-priced credit and good objective advice only make sense. Sometimes, we forget about the obvious, when we are seduced by the novel idea or latest trend.
My goal is instill in the Capital Action Plan these basic principles as we move forward.
Proposed Strategic Actions:
Based on the input and feedback from participants the Capital Action Team agrees to concentrate on building statewide solutions to local capital market challenges that exist at the regional level.
Four actions are proposed for statewide initiatives managed through the Capital Action Team that will be carried out in sequence:
1. Diagnose Capital Access Across California Regions:
Assess capital access challenges facing California enterprise in each of three selected regions by market (rural vs. urban), stage (early vs. mature), size and securitization (revenue and asset base), ownership, as well as sector or cluster. This baseline analysis will be carried out using existing data, new demand and supply-side survey, case studies and/or collaborative working groups. This analysis will be used to inform final design of subsequent actions. Timing: Six months
2. Build a California Regional Capital Map:
Identify, screen, organize and produce an on-line inventory of the continuum of capital sources that serve California regions, beginning with the three pilot regions for which the capital baseline was completed. This action will build from a range of prior inventories (such as CalFOR) as well as any ongoing efforts in participating regions. This action will produce a dynamic on-line information base and a consistent template for organizing capital market information that can be added to (region-by-region) and can also serve as a gate to receive capital use preparation (see next action). The on-line website will be designed to permit tracking of frequency and type of use by those seeking capital (protecting privacy) as well as in contacts with sources of debt or equity to determine how capital access has been enhanced. Timing: Six months.
3. Create a California Capital Market “Navigator”:
Prepare a guide-tool for those seeking capital, regional capital market intermediaries and economic development resources, to assist enterprise in identifying their capital needs and prepare for screening by financial capital sources. This guide will be delivered as a document as well as an on-line navigator tool. This tool will have built in measures of users, their needs, application volume, and transaction completion (protecting privacy) to permit tracking how improved readiness can enhance obtaining debt or equity. The on-line system will also be designed to be able to serve as an effective market-matching resource that first focus on individual lenders or investors and then, over time will enable aggregating demand for lenders and investors by preparing a higher volume of higher quality loan or investment opportunities. Timing: Six to nine months.
4. Convene Regional Capital Markets to Shape
Collaborative Solutions: Improve market access for capital in the three selected California regions by bringing together lenders and investors with a range of enterprise and their intermediaries to identify market challenges and collaborative options to aggregate demand and mediate supply and thereby enhance lending and investment. This action will be informed by the Diagnostic Assessment and Regional Capital Map and serve as a “living laboratory” for new approaches to capital access. While the overall focus of these initiatives is capital market access, there may be specific focus on specific enterprise needs, by size, stage, cluster or ownership. The outcomes of “convening the market” initiatives in regions—identification of challenges, actions, and commitments to enhancements—can be tracked against the baseline, shared statewide and be applied in further collaborative regional capital market initiatives. Timing: Six to nine months.
Marc Nemanic is Executive Director and Chief Credit Officer at 3CORE and a Summit Capital Action Team co-lead.