The government shutdown is nearing two weeks now. With this, numerous government institutions have been closed for business, causing ire among both sides of the political divide. One of the first offices to shut down due to the political quagmire was the Small Business Administration (SBA).
This has, of course, caused a headache both for entrepreneurs depending on its services as well as those who work for the administration. But some are viewing this SBA dormancy as a time for much-needed reflection. These people say that perhaps this is a time to consider what a small business is in the eyes of the federal government.
The SBA has many functions for small businesses. This includes aiding small businesses in government contracts, advising them on their business exigencies, and, perhaps most important, providing loans for these small businesses. According to the SBA’s website, a small business is a nebulous entity defined as something organized for profit, independently owned by a United States citizen, and not nationally dominant in its respective field.
In terms of loans, the government can offer up to $5 million in assistance, with an average amount of around $337,000. Investment advisor and President of the private investment firm Direct Lending LLC Brendan Ross thinks this doesn’t truly represent small businesses as well as it could.
“The big misconception is what the SBA considers to be a small business,” he told me.
While $300,000 may seem like a small amount for companies raising big investment rounds, for every large one of those there are dozens of worthy smaller businesses that need a little bit of help. Ross explains these as “true small businesses, like dentists whose dental chairs break.”
Ross points to a general reticence of the government to take risks on small businesses. He explained in an op-ed he wrote for the Huffington Post that banks have strict requirements for small businesses to be approved, including requiring businesses to be “stable and profitable for at least the past three years.” For new businesses, or those that were affected by the recession, that may be an impossible hurdle.
That’s why he’s taking this time to highlight other options that have surfaced for small business owners. As a limited debt investor, he has generally bought loans ranging from $3,000 to $100,000, and he sees peer to peer lending as a viable option both for businesses in need and potential investors.
He also points to the upsurge of online P2P platforms like Lending Club and Prosper that match entrepreneurs seeking loans to investors. For some, this could be a better option if they don’t measure up to the government’s strict requirements and don’t want to pay the hefty interest rates that credit card companies offer on small business loans.
These platforms are similar to equity crowdfunding sites as they match individual businesses with investors in a peer-to-peer fashion. They differ in that lenders aren’t buying equity in the companies. Instead, the lender is betting that the borrower will simply repay his or her loan over time. While that may mean less of a return, it’s also less risky.
As opposed to the stringent profit-based requirements the government imposes, the vetting process these platforms use look at the cash flow from the last six months and the business owner’s personal credit. So, instead of asking whether a given business has been thriving since the beginning of time, Ross prefers to ask strictly whether these entrepreneurs will be able pay back their loans.
According to him, using these parameters, the answer is generally yes.
From an investor’s standpoint, Ross sees this kind of lending as a safer bet for returns. He points to peer to peer lending’s rapid growth over the last few years. Last July, Lending Club announced it had exceeded $2 billion in personal loans.
With the government’s and banks’ diffidence to approve many small businesses and credit card companies’ large interest rates, advocates for P2P lending want businesses to know about these other options. At the same time, P2P lending is a very new lending space. Some see this as a reason to be cautious.
Additionally, The New York Times writes that while platforms like Lending Club tout a low default rate, it also doesn’t necessarily perform exemplary due diligence on borrower’s income and employment. And given how new this space is, it will probably take years for truly accurate statistics to arise that portend to the entire P2P lending phenomenon. All of this could mean added risk for investors.
Yet Ross wants investors and small businesses alike to reconsider the future of lending with this current closure. But at the same time, let’s be honest, the government should probably just fucking re-open already.