“Sorry I can’t help you, I really want to, but they won’t let me,” my bank manager looked at me with an embarrassed look. Sitting on the desk in front of him was a signed contract from NASA. The guarantor of the funds to pay the loan I was requesting, the United States Government, had a rock solid AAA rating. It controls and prints the money supply. This scenario was repeated the following year and the next year and the next with other government contracts.
I tried another approach, and applied for an ARC loan, a federally guaranteed loan of up to $35,000 with low interest rates. Again, the banks refused. Sympathetic bank managers, in whispered tones, told me “the bank does not make enough on the deal, it is not worth it to them.” I called the local Small Business Administration. The person in charge told me of the thousands of small businesses that had applied for the ARC program in my State, only a handful were approved. Then she added, “I do not understand why they could not have the SBA manage this, we do that in the cases of emergencies, like Hurricane Katrina.”
Banks are no longer in the business of funding small businesses. They have bigger fish to fry like cornering the commodities markets, hedging currency bets, and creating financial arrangements that even their own executives barely understand. They operate not as reservoirs of capital to fund and grow businesses but as casinos and funding sources for massive global corporations with billions of dollars in revenue.
Small businesses are responsible for most of the job creation and nearly all the innovation in the US. The same is true in Britain. The British have a financial system very similar to ours. Now, the British government backed by the Chamber of Commerce has said enough. Vince Cable, the UK Business Secretary is rolling out a government backed small business bank. On the BBC he said:
“Big firms by and large are able to raise short and long-term finance via capital and equity markets. Many successful smaller companies finance themselves through cash flow.The big banks including the big state-owned banks are preoccupied with repairing damaged balanced sheets.”
To drive the point home, he added, “pure laissez-faire economics does not work”. I can hear the howls of socialist, but Vince Cable is part of a Conservative led government and most of the business leaders in Britain agree. Small business banks already exist in Germany, Sweden and other countries, most with higher standards of living and healthier economies than here in the US. Meanwhile, in the New York Times, all I read about is more QE easing, in other words more money for big banks to play with.
The need is even more urgent given the state of venture capital. In a recent interview in Technology Review, preeminent VC Fred Wilson put his finger on the problem facing entrepreneurs and innovators:
“I think there’s too much money in too few hands. So when six white guys in suits control two and a half billion dollars, that’s not a good thing. Instead of being allocated just to one firm, it would be better if that two and a half billion dollars was allocated to 25 firms at $100 million each. It would lead to more diversity or people trying more things: data sciences, urban sciences, transportation, energy, materials science, and many others.”
When capital is concentrated in a few banks and venture capital firms looking for the next home run bet and they fail to support innovators and small business owners, the government is the only refuge of last resort. Without capital, great technologies and great ideas are just pipe dreams, innovation will gradually grind to halt, and small businesses wither on the vine. As John Longworth, the director general of the British Chambers of Commerce, argued:
“The case for a business bank grows clearer with each passing day. Although many companies say their order books are full and they need financing in order to fulfill customers’ requests, the overall stock of lending to small- and medium-sized firms continues to shrink.”
A Small Business Bank is an idea whose time has come.
Peter Doyle is an award winning media marketing, news and documentary producer using rich media to accelerate innovation and commercialization. Check me out at http://www.linkedin.com/in/peterjdoyle