When they seek to buy inventory, expand, or hire new employees, businesses need credit. And small businesses, which generate between 60 to 80 percent of America’s new jobs, need credit most of all. In fact, when businesses fail, they most often do so because of undercapitalization. Each time a good business fails simply because it cannot get credit, the economy has snuffed out another potential Microsoft or General Electric.
A strong economy requires innovative ways to expand the supply of credit to smaller enterprises. It may surprise many policy makers, but a review of the literature suggests that small businesses often rely on credit cards and home equity loans for financing. Few go directly to banks, credit unions, or other lenders for business loans while they remain small. Yet nearly any small business seeking to grow large cannot do so with credit cards alone: It must go to a lender—often a bank or credit union—to get a loan.
This paper examines one way in which the nation might increase the supply of small business credit: relaxing restrictions on credit union business lending. It consists of three sections. The first describes credit unions in general. The second outlines the role that credit unions play in business lending. The third assesses a proposal to expand credit union business lending and speculates as to its likely consequences for the economy as a whole.