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Hearing of the Economic Growth, Tax and Capital Access Subcommittee of the House Small Business Committee - Where Are We Now? Examining the Post-Recession Small Business Lending Environment


Location: Washington, DC

Good morning! Today's hearing will examine the current state of lending to small businesses. Although in the last two years the lending environment has slightly improved, bank loans to small businesses remain below pre-recession levels. Multiple factors and economic trends affect small business lending, and today, we are going to receive testimony from experts and industry leaders on this important matter.

Evidence suggests that our nation's economy is slowly, but surely, on the mend. 7.8 million jobs have been created since the post-crisis low in 2010. The housing and auto industries -- which were central to the downturn -- have rebounded. The Federal Reserve's monetary policy stance has remained conducive, providing market liquidity and supporting a resurgent stock market. The small business sector is also experiencing an uptick in hiring. Still, expansion expectations are below the norms seen during previous economic downturns.

For job growth to accelerate and reach the pace our economy needs, small businesses must become a bigger part of the equation. In every previous recession it has been small, nimble firms that led us back toward prosperity, by growing quickly and adding new workers.

In order for these firms to play their traditional, job-creating role, a number of factors must be in place. Perhaps the most important ingredient is the availability of capital. If, as the saying goes, small businesses are the economy's backbone, then the flow of capital is the lifeblood.

Since the Great Recession, the value of small business loans remains at less than 80 percent of its pre-recession level. The number of loans issued also dropped from over 25 million before the recession to just over 21 million in the second quarter of this year. Although challenges remain, there has been progress. The Thompson Reuters/Pay Net Small Business Lending Index is well off of its low -- but remains below its highs. This indicates that firms are borrowing again, but are hesitant about the future. Fewer are also falling behind or defaulting on loans, suggesting they are in better shape to take on additional debt -- and, hopefully, expand.

Within this context, it is important to remember that lending through the Small Business Administration is always critical for entrepreneurs seeking affordable capital. However, during periods of economic sluggishness -- when credit is tight elsewhere -- the SBA's role becomes more important.

Last year, the agency made nearly $18 billion in 7(a) loans and made available another $5 billion in financing for projects under the 504 program. Unfortunately, while this represents a positive trend in the total dollars lent, the number of businesses receiving SBA loans has fallen dramatically. Compared to the agency's high-water mark in FY 2007 when over 110,000 small businesses received loans though these programs, the total number helped has fallen by 51 percent -- meaning that 56,000 fewer small businesses received loan assistance this year. Understanding what this trend means for entrepreneurs -- and what is driving it -- is of great concern to this Subcommittee.

All of this lending activity is occurring against a regulatory backdrop that is changing dramatically. Dodd-Frank resulted in a vast array of new regulations on the financial sector and established several new government entities. These new powers are necessary to address the root causes of the financial crisis -- overleverage and deceptive mortgages to name a few. At the same time, we must be sure our nation's small banks and credit unions that were not the cause of the downturn are exempted.

While regulations implemented under the Act will change many facets of the financial industry, data indicates that the perceived "regulatory burden" has had no negative affect on small business lending. In fact, a consortium of the nation's most prolific small business lenders recently announced that they had made an additional $17 billion in loans over the past 2 years.

At today's hearing, we will take the pulse of the small business lending environment and gain insight about how to expand small firms' financing options. As we do so, it is important to remember that what makes sense for one entrepreneur, might not work for another -- and that there is a broad spectrum of capital options for small firms. Some businesses' needs can be met with conventional loans. For others, a debt-based solution may not make sense at all -- equity investment might be a better fit.

The reality is that what works for a tech startup in California is often not appropriate for a small manufacturer in Ohio, or a family farm in Kansas.

On that note, I would like to thank our witnesses for taking time to be here. Their views and experiences will be valuable to the Subcommittee as we consider how best to meet small businesses' capital needs.

Thank you and I yield back.

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