They are the hardest working Americans, operating their own business, trying to push themselves forward, but somehow they just can't catch a break.
Small businesses - we see them in every town: specialty shops, deli restaurants, hair & nail salons, yoga studios and so many more. We know the owners by name; we see how they interact with their customers and support their community.
According to a recent Harvard Business Review article, small businesses are crucial to continuous job creation in the U.S economy. Since 1995, small businesses have created two of every three jobs - 65 percent of total net job creation. (Mills and McCarthy, 2014). However, the Washington Post is quoting a new 2014 Brookings Institution report indicating that businesses are shutting their doors more quickly than new ones are popping up.
So what is going wrong? Are we, as a society, failing small businesses? Do we look the other way when small businesses shut their doors?
Seeking answers, I met with Jack Elaad, a seasoned banking executive and former Chairman of FIBI (one of Israel's top 5 national banks). For many years Jack has had a first-row seat as a banking industry insider, watching the financial game up-close and personal. "As an insider", Jack reflects, "I observed all the hurdles small-business owners faced on their path to getting a simple loan approved". Jack views this phenomenon as a systematic malfunction, as an injustice.
At the time, he didn't understand the lack of support for the growth of small business in the financial industry. Calling him a 'modern day Robin-Hood' for small business owners makes him smile... But professionally, Jack knew something had to be done to shake up the financial system and create new hope for hard-working business owners. This notion led him to become the Co-Founder of Credithood, a FinTech startup looking to address the economic pain of Main Street, U.S.A. We discussed the reasons small businesses can't get ahead in the game in today's market.
Says Elaad - "The reality is that when a small business is looking to grow and seeks funding from banks, they get turned down. In fact, most SMB loan applications are declined by traditional banks. Only few business are found eligible for a loan. Very few".
Those 'lucky' ones then have to face the most stringent terms there are, often such that they can't afford to take: they have to provide personal assurance, they have to pay high interest rates, and they only qualify for short loan repayment terms. Clearly, not a good deal for small businesses.
Why does it happen? Elaad: "One of the key reasons is that traditional banks have a very high processing cost for each loan, regardless of the loan amount, as they process every loan the same way. A loan for half a million dollars is going through the same process as a loan for $10,000. Therefore, banks will prefer offering better terms to the larger-amount borrowers, leaving the smaller businesses with the less desirable terms".
Another factor is the business-profile test that banks examine, which is misleading for small businesses. Instead of looking at the business reputation, they look at credit scores. Instead of looking into the customer base, satisfaction and loyalty, they look at cash reserves.
Sadly, traditional banks do not see small businesses the way they could be looked at - as community- backed businesses where owners work hard for customer appreciation and loyalty.
The criteria for small-business loans should be based on past success and future potential of the business, based on the vote of confidence and trust it gets from its loyal customers, suggest Elaad. "This is why we created Credithood".
Jack assures me that the revolution in this space is coming soon, starting with Credithood's launch earlier this month in New York.
More about what small businesses are currently doing in order to seek funding online - in the coming blog post.
Stay tuned!