WASHINGTON – Today, the U.S. Department of the Treasury (Treasury) released a policy brief: Financing Small Business: Landscape and Recommendations. The brief builds on Treasury’s longstanding work to support small businesses and summarizes feedback gathered from the Office of Financial Institutions Policy’s September roundtable on small business finance and financial institutions, which focused on recent changes in the small business finance market due to emerging technology and artificial intelligence.
The brief describes trends in small business capital access and the growth of non-bank financial technology providers in the small business market. The note also summarizes barriers facing small business owners seeking financing from capital providers, including banks, fintechs, and credit unions, and highlights particular issues faced by small business owners who have struggled to obtain financing. The brief outlines potential next steps to be considered by Treasury, government agencies, and the financial services sector to foster a robust small business financing market.
Key findings in the brief include:
- Many small business owners expressed difficulty in obtaining information about, or comparing, financial products, especially those with variable repayment terms, interest rates, fees, or financing arrangements, including merchant cash advances, factoring, or equity financing, which may contribute to a less competitive market;
- Over the last decade, large banks have tightened credit standards and originated fewer loans,[1] while fintechs have originated more loans to small businesses;
- Community banks and mission-driven lenders, including CDFIs, and targeted funding programs, including SSBCI, have made a meaningful impact in providing capital to underserved populations but may not fill remaining gaps in capital access; and
- Underserved business owners can face unique challenges, including limited connection to small business capital sources, lack of personal resources, and cultural barriers to accessing financial services.
Key recommendations in the brief include:
- Policymakers continue to engage with industry stakeholders to evaluate the need for additional small business financing and discuss how to expand access to fill gaps;
- Capital providers consider how to deepen small business access to capital, including through leveraging government programs (such as Small Business Administration programs), within prudent risk management standards;
- Policymakers, including legislators and regulators, conduct research and analysis to determine whether small business capital providers would benefit from more uniform product disclosures across product types, enabling more ready comparison and stronger competition;
- Capital providers consider voluntarily developing uniform disclosures with understandable terms for small businesses, including information about repayment terms and fees;
- Financial regulators continue to coordinate with other government agencies (including Treasury) to foster a robust and inclusive financial system, which includes small business financing, and develop coordinated resources for small business owners; and
- Regulators continue to coordinate their approach to emerging technologies, such as AI, including promoting consistent and robust standards for financial institutions deploying new technology.
View the full report here.
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[1] Large banks are defined as those with total domestic assets over $10 billion. Dustyn DeSpain and Jordan Pandolfo, New Small Business Lending Declines as Credit Standards Continue to Tighten, Federal Reserve Bank of Kansas City (Sept. 27, 2024), https://www.kansascityfed.org/surveys/small-business-lending-survey/new-small-business-lending-declines-as-credit-standards-continue-to-tighten/.