Barriers to Entrepreneurship: Access to Credit

Before the financial fallout of 2008, the process of entrepreneurs accessing credit was fairly simple. A potential entrepreneur would design his pitch and take it to the loan officer at his local bank. The bank would stand to gain the most if the loan was repaid and thus would not give out a loan unless they believed it would be repaid. Then the originator of the loan would likely sell it to a master servicer within minutes of completing the underwriting process. If the borrower defaulted, the master servicer would then sell the loan to a special servicer, who could renegotiate terms or seize the collateral. This model generally worked.

With community banks, the loan process is built on familiarity between parties. Creditors have better knowledge of those they loan to; while borrowers understand the stigma earned and the hardship they would cause to the bank by not paying their debts. Because of this culture of trust, there are lower default rates, and banks are able to serve clients who wouldn’t make it through a more corporate vetting process.

Since the 2008 Financial Crisis and the implementation of Dodd-Frank in 2009, sources of business capital for low-income innovators and entrepreneurs have diminished. In the 2014 survey of 1,242 companies conducted by the Kauffman Foundation, 45 percent of new companies cited lack of credit access as a business challenge. This number remained unchanged from 2013 and 2012. Supporters of the Dodd-Frank Act sold it as promoting soundness and stability by reining in Wall Street and the big banks. Instead, much of Dodd-Frank is broad enabling act grating power to executive – agency bureaucrats to write specific regulations that reduce the access to credit for entrepreneurs through these community banks. How did this happen?

Continue Reading