What is a small business in the United States?
According to the definition of the Small Business Administration (SBA), manufacturing enterprises with less than 500 employees and service enterprises with less than 100 employees are classified as small enterprises. According to this standard, there are about 27 million small enterprises in the United States, accounting for 99% of the total number of American enterprises. Small businesses have absorbed more than half of the US employment population and created more than half of the country’s GDP. It can be seen that the importance of small business development to the US economy is self-evident. And many well-known large companies in the United States are grown by small companies, such as Apple, Hewlett-Packard, Intel, Google, and so on.
The survival and development of enterprises cannot be separated from the support of banks. This is the same for large and small enterprises, more dependent and especially small enterprises. However, banks are also enterprises, and they also want to make money. For banks to support small enterprises, the government needs to create a market environment where risks can be controlled and profits can be made for financial institutions. Only then can banks have the motivation to voluntarily support small businesses.
Not all banks can engage in the loan business guaranteed by the Small Business Administration. To engage in this business, they must be approved by the Small Business Administration. Currently, about 7,000 commercial banks have established cooperative loans with the Small Business Administration. Guarantee relationship. Pictured is Maria Contreras-Sweet, current director of the US Small Business Administration (SBA).
Small businesses need money
Compared with large enterprises, small enterprises have low financial transparency and poor ability to resist risks, so their direct financing ability from the capital market and bond market is very weak. In the 1990s, only 2% of the financing composition of small businesses in the United States was obtained from institutions other than banks, and the vast majority of capital needs had to rely on bank loans. The situation of small farmers is even more pitiful, and more than 99% of their required funds have to rely on banks.
Do banks prefer small businesses to capital investors and bond investors? no. It is often said that banks “dislike the poor and love the rich”, but instinctively, banks have no incentive to care for small businesses. So why aren’t banks turning away small businesses? One of the main reasons is the mandatory requirements of the law.
Deterrence of CRA Ratings
To balance regional, racial, and income differences, and to promote the development of small businesses, Congress passed the Community Reinvestment Act (CRA) in 1977, requiring banks to meet low- and middle-income families in their communities. and small business credit needs. The bill requires the appropriate federal financial regulators to evaluate bank records to assess whether the bank is meeting the credit requirements of the entire community in which it operates while maintaining safe and sound operations. The four major financial regulators in the United States – the Office of the Comptroller of the Currency (OCC), the Federal Reserve (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Superintendent of Thrifts (OTS, which were later merged into the OCC) must rate banks and savings institutions, and consider their CRA ratings when reviewing bank and thrift filings for branch additions and mergers. In 1995, various financial regulatory agencies issued new CRA rating standards, which changed the 12 evaluation elements originally stipulated to three measurement standards based on loans, investment, and services. Among them, the loan test measures various types of loan behavior including small business loans and small farm loans. The evaluation criteria include the geographical distribution of loans and the distribution of loans by different types of borrowers.
It is against this backdrop that the 1990s saw a rapid increase in lending to small businesses by many large banks, such as Norwest Key and others, which established specialized divisions to help small businesses apply for loans, manage working capital, and provide other services. These services are often tied to CRA ratings. In addition, to obtain approval as soon as possible for mergers and acquisitions, many large banks have added new commitments to provide loans to small businesses in addition to proving to regulators that their CRA ratings are high. For example, when Citigroup acquired Traveler Group in 1998, it promised to provide loans and investments totaling up to $115 billion to low- and middle-income communities and small businesses over the next ten years.
Since 1989, CRA rating results have been made public to the public, and any institution can purchase CRA rating information from the Federal Financial Institutions Inspection Commission (FFIEC). The Federal Reserve will also regularly announce the situation of banks’ loans to small businesses in the form of announcements. For example, in 1996, the Federal Reserve’s survey report on 1,564 commercial banks and 514 savings institutions pointed out: under the requirements of the “Community Reinvestment Act”, these deposits are Lenders issued 2,414,805 loans to 216,629 small businesses, amounting to $147 billion.