Small business owners and regulators are often at odds with one another, but a new move from the country’s consumer watchdog agency could have the two groups aligned in a common cause — better access to business credit.
In a new initiative announced early Wednesday morning, the Consumer Financial Protection Bureau (CFPB) said it’s seeking comment and information from business owners, lenders and any related parties into how to better track and understand the financing needs of small businesses, particularly minority-owned and women-owned shops.
The bureau, in a white paper to be released later on Wednesday, estimates that small business access roughly $1.4 trillion in financing, but that the data surrounding where they access those funds, and whether there are significant differences in capital availability depending on location, gender and race, is incomplete or outdated. CFPB Director Richard Cordray said in a Los Angeles field hearing on Wednesday that he has seen first-hand the struggle for many small businesses to access financing.
“When I served as the Treasurer of Ohio, we had a reduced-interest loan program to support job creation and retention by small businesses,” Cordray said. “The way the program worked was that the state could put money on deposit with banks at a below-market rate of interest, and this deposit was then linked to a same-sized loan to a small business at a correspondingly below-market rate. This so-called ‘Linked Deposit’ program had been authorized more than 20 years earlier, but had gradually fallen into disuse.”
After streamlining the program, rebranding it and moving the application process online, Cordray said it found new success.
“Only about $20 million had been allocated when we started, but in less than two years we deployed more than $350 million, helping about 1,500 small businesses create or retain approximately 15,000 jobs across the state,” he said.
Levi King, CEO and Co-Founder of Nav, is familiar with the challenge of getting a small business loan — he’s started five businesses.
“In my first year of business, I had a crash course in the importance of financing,” he said. “Regular financing eliminated my need to dip into personal funds to run my company. It enabled me to hire new employees and buy better equipment. In short, it brought order to chaos, as a surge in liquidity meant that I could react quickly to new opportunities without upsetting operations.”
The CFPB is tasked with certain oversight functions under the Dodd-Frank Wall Street Reform Act. One of those is to create regulations on small business lending data that financial institutions are required to report to the agency. Wednesday’s announcement kicks off the comment period, during which all interested parties can weigh in and give the bureau advice and guidance on how to best implement and design the new regulations. The goal is to ensure any new data collected will help the agency spot any credit access issues small business owners may be facing. Once the comment period is over, the agency generally reviews the input and crafts proposed regulations. If new and better data sources are added, that data could potentially be made publicly available on the CFPB website like much some consumer lending and complaint data is currently.
The CFPB’s news comes just a few weeks after 12 Federal Reserve banks from across the U.S. released their Small Business Credit Survey, finding that most small businesses faced a financial challenge in 2016 and that the most common challenge was getting business financing when they needed it. Business owners leverage both their personal and business credit scores in order to obtain financing, with many starting with business credit cards. (You can get tips for establishing business credit and check your business credit scores for free at Nav.)
This article was originally written on May 10, 2017 and updated on January 20, 2021.