Coauthored with Lindsay Lewis, executive director of the Progressive Policy Institute.
It’s hard to find common ground between the two parties in Washington these days, but getting America out of this protracted entrepreneurial slump should be an urgent national priority. Here’s one idea that ought to appeal to both sides: Enable the nation’s credit unions to invest more in new and small businesses.
One of the most important measures of U.S. economic dynamism is the rate of new business creation. Unfortunately, the number of start-ups has been declining for three decades. In fact, more businesses are dying than being born.
According to the Kauffman Foundation, new businesses (those less than five years old) are responsible for nearly all net job creation in America. And businesses less than one year old have created an average of 1.5 million jobs per year for the last three decades.
And it’s not just jobs; start-ups also drive innovation. New enterprises “commercialized most of the seminal technologies of the past several centuries, including the car, the airplane, the telegraph, the telephone, the computer and the Internet search engine,” notes Brookings Institution economist Robert Litan.
America’s small businesses, 29 million strong, employ more than half of the country’s private sector workforce. According to the Small Business Administration (SBA), they create seven of every 10 new jobs. Unfortunately, since the 2008 financial crisis, small business lending has trailed other business lending, and overall, loan levels remain below their peak prior to the financial crisis. How do we ensure that small businesses get the resources they need to grow? What can be done to help them succeed?
Access to capital is vital. The SBA says that businesses borrow for four principal reasons: starting a business, purchasing inventory, expanding the business, and strengthening the firm.
The financial crisis caused many lenders to tighten their purse strings, leaving Main Street struggling. And credit continues to be difficult for businesses to get. But while many banks cut back, credit unions continued to lend. According to a Pepperdine University study, business lending dropped 2.2 percent for banks but increased 43.2% for credit unions in the four years after the onset of the financial crisis and Great Recession.
As not-for-profit, community-based, member-owned financial institutions, credit unions are a natural match for small business and new business lending. They are in the unique position of understanding the needs of their business members because credit unions work for their members, and understand the challenges that local businesses face at home.
Credit unions also play a vital role in providing capital in underserved communities. Forty-five percent of credit union branches are located in Community Development Financial Institution investment areas, helping finance businesses to create jobs in these areas certified by the Treasury Department as underserved.
And credit unions could do even more were they not constrained by outdated federal regulation. In 1998, Congress for the first time imposed a cap on credit union lending of no more than 12.25 percent of their assets to “commercial loans.” While the intent may have been to limit the exposure of credit unions to large commercial loans, the effect of the legislation has been to limit the ability of credit unions to serve the credit needs of small businesses.
Banks are worried that credit union business lending would hurt their efforts. However, a SBA study found that 80 percent of additional lending created by raising the credit union lending cap would be new small business lending – new opportunity and new jobs for many around the country. It also means that the 93 percent small business lending market share enjoyed by banks today would not be jeopardized.
Bipartisan legislation to help small businesses access capital does exist. This month, Sens. Rand Paul (R- Ky.), Sheldon Whitehouse (D-R.I.) and Jack Reed (D-R.I.) introduced the Small Business Lending Enhancement Act of 2015 to encourage small business creation and growth. Reps. Ed Royce (R-Calif.) and Greg Meeks (D-N.Y.) introduced similar bipartisan legislation, the Credit Union Small Business Jobs Creation Act, earlier this year in the House. Both bills seek to increase the credit union member business-lending cap for well-capitalized credit unions from 12.25 percent of assets to 27.5 percent, a reasonable approach that would increase access to credit for small business while keeping protections in place.
The Credit Union National Association (CUNA) predicts that doubling the lending cap would generate a first-year increase in capital of $14 billion, which would translate into approximately 152,200 new jobs. And it wouldn’t cost U.S. taxpayers a cent.
Of course, a lot more must be done to reverse the decline in startups and the continuing credit squeeze on small businesses. Reinvigorating entrepreneurship in the United States will require changes in immigration policy, more crowdfunding (so ordinary people can invest in startups too) and a comprehensive review of regulations that pose unnecessary barriers to the entry of new firms, or the expansion of existing ones.
The cap on credit union lending certainly falls within that category, and we encourage the House and Senate to act on business lending legislation. Lifting the credit union lending cap would allow America’s credit unions do what they do best — create opportunities in their communities by giving local entrepreneurs and small businesses access to capital.