Small Business Access to Capital: The Numbers and Trends on Loans and Angel Investment

By SBE Council at 16 April, 2016, 9:13 am

by Raymond J. Keating-

On April 14, I testified before the House Financial Services Committee, Subcommittee on Capital Markets and Government Sponsored Enterprises on the topic of “The JOBS Act at Four: Examining Its Impact and Proposals to Further Enhance Capital Formation.”

Chairman Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets and GSEs, U.S. House Financial Services Committee, is sponsoring one of four bills that was discussed at the “JOBS Acts at Four” hearing on May 16, 2016. (Watch the hearing by clicking the image above.)

The focus of the hearing was to not only review what’s happened with the JOBS Act as it related to access to capital for small businesses, but also on four pieces of legislation aimed toward improving what the JOBS Act set out to do, that is, helping to stimulate the U.S. economy by promoting capital formation. (Read SBE Council’s media release on the hearing here.)

One aspect of my testimony looked at key trends on the small business loan front, as well as the state of angel investment. A few points:

Small Business Loan Value Still Down. Consider the decline in bank small business loans (less than $1 million) over the past several years. The value of small business loans outstanding hit a high of $711.5 billion in 2008, and subsequently fell for five straight years, with some growth resuming in 2014 and 2015. The 2015 level came in at $599.3 billion, which is roughly where the small business loan level was in 2005. That’s a decade of no growth.

Data Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile

Shrinking Small Business Loan Share of Total Business Loans. The small business share of commercial and industrial loan value outstanding registered, for example, 33 percent in 1995, 35 percent in 2004, and 30 percent in 2007. As of the fourth quarter of 2015, however, it had fallen to only 20 percent. Looking at nonfarm nonresidential loans, the small business share came in at 52 percent in 1995, and had declined to 39 percent in 2007. At the end of 2015, the small business share further declined to 23 percent.

Number of Small Business Loans Have Not Recovered. As for the number of small business loans, these rose steadily up to 2008 (hitting 27.1 million in 2008 compared to 6.3 million in 1995), and subsequently declined and struggled to recover, climbing back to 24.3 million in 2015.

Data Source: Federal Deposit Insurance Corporation, Quarterly Banking Profile

Angel Investment Has Not Yet Recovered. On the equity side, angel investment is a critical source of funding for start-ups and early-stage businesses. But here, again, the story has been one of under-performance or sluggishness in recent years. According to the Center for Venture Research at the University of New Hampshire, after a big drop in 2002, coinciding with the aftermath of the 2001 recession (as well as the post “tech bubble”), growth resumed from 2003 through 2007, with angel investments increasing from $15.7 billion in 2002 to $26 billion in 2007. However, subsequently, there was a big drop-off in 2008 and 2009, and the subsequent growth has been underwhelming. For all of 2014, angel investment came in at $24.1 billion, down from $24.8 billion in 2013, and still not back to the $26 billion level in 2007. In fact, the 2014 level came in just ahead the 2005 level – again, nearly a decade of no growth. For the first half of 2015 compared to the same period in 2014, angel investment was up by 4.1 percent.

Source: Center for Venture Research at the University of New Hampshire

In the end, long after the financial crisis hit in late 2008 and the Great Recession came to an official end in mid-2009, the value and number of traditional small business loans are still down markedly, and angel investment is still down compared to 2008. Based on these numbers, the struggle for entrepreneurs to gain access to the financial resources needed to start up, thrive or just survive continues to be difficult.

The decline in small business funding has varied reasons, including the overall weak state of the economy and declining levels of entrepreneurship working on the demand side, and costly government regulations, such as via Dodd-Frank, working against bank lending for small businesses.

But the JOBS Act has served as an important counterweight to these trends, offering new avenues, such as via equity crowdfunding, for small businesses to gain access to financial capital. In fact, on May 16, 2016, Title III of the JOBS Act will finally take effect, which means ordinary investors will be able to invest in entrepreneurial firms via regulated platforms. In addition, members of Financial Services Committee, like Subcommittee on Capital Markets Chairman Scott Garrett (R-NJ), have offered important bills that build upon the JOBS Act to strengthen capital access and options for raising capital for entrepreneurs. SBE Council supports these bills, which include:

H.R. 4850, the “Micro Offering Safe Harbor Act” (SBE Council support letter.)

H.R. 4852, the “Private Placement Improvement Act of 2016” (SBE Council support letter.)

H.R. 4855, the ‘Fix Crowdfunding Act” (SBE Council support letter.)

H.R. 4854, the “Supporting America’s Innovators Act of 2016”

As SBE Council President & CEO Karen Kerrigan summed up: “The lack of access to capital is holding budding entrepreneurs and promising firms back, and without money or credit these businesses cannot grow, innovate or create jobs. The JOBS Act is a potent mix of regulatory reforms and relief that will free up precious capital for growth, and create new models and platforms for businesses to raise funds.” And, she added, “Much more can be done to ensure our policies encourage investment and more abundant capital for our nation’s entrepreneurs.”

Raymond J. Keating, Chief Economist