Innovation Stalls When Banks Don't Lend to Small Businesses

Entrepreneurs are the backbone of our economy. They are our most important innovators and job creators.

The Growth Entrepreneurship Index estimates that the Rate of Startup Growth in 2015 was 58.5%, representing a jump of 11.6 percentage points. That means newer companies contributed approximately 200,000 more jobs to the economy than in the previous year.

So you would think that banks would bend over backward to give these start-ups the capital they need to grow and hire.

You would be wrong. As a result of the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, it resulted in government interference that has crippled small businesses and stunted job growth.

The Benefits Pro Small Business Provider e-zine writes that “because of Dodd-Frank, there are significantly fewer community banks and credit unions in existence. Succumbing to the weight of the regulations, they have either gone out of business completely or been gobbled up by larger regional and national financial institutions. Second, the smaller community banks and credit unions that do remain have become so focused on devoting resources to complying with Dodd-Frank requirements that they have less time and resources to focus on lending to small businesses or are reducing the numbers and types of loans that they do make.”

According to the Wall Street Journal, the United States is losing on average one community bank or credit union a day because of Dodd-Frank. American Action Forum released a study analyzing the overwhelming costs of the legislation; $24 billion in final rule costs and 61 million paperwork burden hours.

Congressman Jeb Hensarling (R-Texas) compared Dodd-Frank to "Obamacare for our economy." Hensarling reasons, "Dodd-Frank has left us with fewer choices, higher costs and less freedom." Small business institutions simply cannot afford to comply with these rules. Community banks and credit unions are increasingly forced to close as a result of ever worsening regulations and compliance costs.

So large banks and even community banks are no longer a source of capital or lending. Getting a small business bank loan is never easy. It’s been especially difficult since the financial crash of 2008 and the lingering credit crunch. Even though small business lending is rebounding somewhat, it is still virtually impossible to get a loan to open a new business.

That’s because lenders want to see a financial track record for your business that demonstrates your ability to repay the money they’re lending you. Without that kind of history, the lender has no way to know if your venture will be successful enough to make good on your obligation. Banks are lenders, not investors, and they’re not interested in knowingly making equity investments in a business.

The net effect is that lenders are unwilling to take risks, so they resist funding innovation, which has historically spurred financial growth.

Forbes staff writer, John Tamny, who appeared on my Made in America radio show, contended that “our stagnated American standard of living is related to an innovation slump, and that looking at employment figures is misleading. In fact, he proposed that we’re not destroying jobs fast enough. That less productive work is not being replaced by work that is a great deal more productive. This means that our living standards aren’t rising as quickly as in the past. Investors loathe stationary economies, and the slower pace of innovation personifies the stasis that investors avoid. In short, the lack of innovation has presumably fed on itself.”

“If you think that the federal government will come to the aid of small businesses to help regenerate America’s reputation as an innovative leader, you would be wrong again. Since 1913 the Fed has been the lender of last resort. They started off only lending to solvent banks. But over time, it became the lender of last report for banks that were failing. Today, borrowing money from the Fed is a sign of insolvency. They are a terrible regulator of banks,” suggested Tamny, who added that real finance occurs away from banks; and instead takes place among private investors.

I am a manufacturer with multiple companies and brands, and with a good track record of financial results, but I have been forced to work with private banks that are far less regulated and more likely to take on risk, but carry much higher lending rates. .

The problem is that the federal government is always looking at the past. Looking at the past means they aren’t looking at the future. That means they aren’t investing in innovation. It comes down again to having the capital to build the new companies that evolve the new ideas and technologies.

Bloomberg's 2015 ranking of the world's 50 most innovative countries, which focuses on six tangible activities that contribute to innovation, ranks South Korea first. The U.S. places sixth, and China 22nd. This is extremely disappointing if we look at the innovations created in America that have shaped the world.

If we want America to resume its global leadership in innovation, a big first step is to repeal Dodd-Frank so that community banks can resume lending to the small companies of today that will one day be the big companies of tomorrow. With a new President in town, there is finally a very good possibility this will happen.

Neal Asbury is chief executive of The Legacy Companies.