Tori 500 Dirty Business 8
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Ongoing construction of the biggest development in Mattapan Square in decades has raised the prospect of a revival, while stoking fears that existing small businesses could be displaced. A $57 million building containing housing and commercial space, developed by two Boston-based nonprofits, is slated to open this summer on a former MBTA parking lot on River Street. Its price tag eclipses the $32 million spent to construct the new Mattapan Community Health Center a decade ago.
In the next five years, city leaders envision other major developments in Mattapan, which historically has seen less development than other neighborhoods in Boston. Twelve new projects and a $60 million rehabilitation of Blue Hill Avenue are in the planning stages.
Mattapan is home to churches, a community center for teenagers, yoga studios, massage parlors, salons, sports programs, an urban farm, historic landmarks, an active biking community and a number of mostly takeout restaurants.
Section 2227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires that, every five years, the Board of Governors of the Federal Reserve System submit a report to the Congress detailing the extent of small business lending by all creditors. The act specifies that the study should identify factors that give policymakers insight into the small business credit market, including the demand for credit by small businesses, the availability of credit, the range of credit options available, the types of credit products used, the credit needs of small businesses, the risks of lending to small businesses, and any other factors that the Board deems appropriate.1
Between 2012 and 2017, the years covered by this report, financial markets were generally tranquil and remained accommodative of growth in spending and investment. Supported by low interest rates, equity prices rose notably over this period, and yields on corporate debt remained low. The U.S. economy expanded at a moderate pace, and labor markets approached full employment. Continuing the recovery from the financial crisis, debt on the balance sheets of nonfinancial businesses expanded, supported by robust increases in corporate bonds and banks' loans. While terms on business credit also eased, on net, debt growth was restrained by limited demand for borrowing by small businesses.
The concerns of the Congress and other policy- making bodies about small business financing largely stem from the perception that small firms have more difficulty gaining access to credit than do large businesses or other types of borrowers. The source of this difficulty may be the higher cost of lending to small firms due to greater riskiness or challenges in evaluating and monitoring credit risks, or it may be inefficiencies in markets that hinder pricing of risk or impede the effective pooling of risks. To the extent that private-market impediments or inefficiencies are the source of any difficulties for small business financing, policymakers may focus on measures that mitigate these market failures. It is important to note that no single policy prescription would likely work for all small businesses, and no single definition of small business would be appropriate for all industries. As discussed in this report, credit needs and borrowing sources differ widely among small businesses.
One challenge for this report is that up-to-date and comprehensive information about the universe of small businesses is sparse, with most evidence about financing needs and sources derived from surveys. One relatively new survey, the U.S. Census Bureau's Annual Survey of Entrepreneurs (ASE), launched in 2015, shows that the use of credit products exhibits some clear patterns. Among all of the types of financing that small business operators were asked about, owner financing was the most commonly used type, followed by financing from banks and other finance companies. While grants and outside investors provide vital financing for certain small businesses, this type of funding is only given to a very small share of firms.
The ASE also shows a clear relationship between firm age and credit use. Young small businesses are more likely to tap into informal sources of credit such as funding from owners or family and friends, while older firms are more likely to receive funding from more traditional sources. This difference is likely tied to the greater informational opacity of new firms. This opacity might make evaluating creditworthiness more difficult for arms-length lenders, which could reduce the supply of more formal credit available to young firms.
In most cases, small businesses appear to have been able to meet their credit needs. However, in some cases, small businesses may have wanted more credit than they were able to obtain. Data from the ASE indicate that in 2014 the majority of firms did not apply for a new loan of any type, although, for those that applied, success rates were relatively high. Among the 13 percent of firms that applied for a bank loan, nearly three-fourths received the full amount for which they applied. Credit card applications were slightly less frequent than bank loan applications, although a bit more likely to have been approved. New home equity loan applications for businesses were even less common, with slightly more than 30 percent of applicants not receiving all of the funding they sought from this source.
Some firms that may have wanted additional credit may not have applied for it because they anticipated that their applications would be denied. Such firms are known as "discouraged borrowers." The ASE asks firms whether there were times during 2014 when the business needed additional financing but the owner chose not to apply. Almost 10 percent of firms fell into this category. The reason most commonly stated for not applying for additional credit was that the firm did not want to accrue debt, with nearly two-thirds of discouraged firms providing that response.
Usage of different types of small business credit varies by the age and industry of the firm as well as by the gender, race, and ethnicity of the owners. However, the usage represents the intersection of what firms would like to use to finance their firms with what providers are willing to supply. The additional questions in the ASE on loan applications and forgone applications would indicate that--at least for some firms--demand exceeds supply. But it is important to keep in mind that not all credit applications should be approved. There is a great deal of fluctuation in the small business population, and determining which businesses are a good credit risk is a challenge that small business credit providers need to carefully evaluate.
Because banks are the leading source of external credit to small business, much attention has been paid to developments in banking that may influence credit availability. The substantial consolidation of the banking industry over the past 25 years is one such development. Mergers and acquisitions have dramatically reduced the number of banks, thereby increasing the importance of large institutions and the concentration of industry assets. These changes to the structure of the industry have raised concerns about possible reductions in the availability of credit to small businesses because large banks tend to be proportionately less committed than smaller banks to small business lending.
Despite their declining numbers and a fall in their share of industry assets, however, small banks continue to account for a sizable share of small business loans. In 2016, banks with assets of $250 million or less accounted for 58.2 percent of all banking organizations but only 2.4 percent of all banking assets (table 16). However, they held 9.1 percent of all small business loans and 8.2 percent of microloans. Similarly, the 30.2 percent of banks with between $250 million and $1 billion in assets held 5.0 percent of industry assets, but 16.9 percent of small business loans and 9.9 percent of microloans.
The relevant market for many small business loans remains local. The structure of the local banking market is particularly important because changes in concentration could affect the level of competition for small business lending, which, in turn, could influence the cost of borrowing and the quantity of credit demanded. To address some key issues associated with the availability of credit to small businesses, one must shift the analysis from lending at the industry level to the local level. Analysis of bank structure within smaller geographic areas is likely to capture more accurately the relevant market conditions that small firms face when seeking credit, and that influence competition in the market for small business loans. The primary measure used by antitrust authorities to assess market concentration is the deposit-based Herfindahl-Hirschman Index (HHI), which is computed as the sum of the squared market shares (that is, the shares of total deposits) of each firm in a market. In 2016, the average level of the HHI was 1,694 in urban areas, 2,396 in micropolitan areas, and 4,254 in rural areas. These numbers were little changed over the period.
Savings institutions, defined as savings banks and savings and loan associations, provide much less credit to small businesses than do commercial banks. The primary lines of business for these institutions, often referred to as thrifts, tend to involve providing retail financial services, such as residential mortgage loans, savings accounts, and negotiable order of withdrawal (or NOW) accounts, to households. As of June 30, 2016, there were 4,824 commercial banking organizations and 763 thrifts (tables 15 and 21). The value of small business loans held by savings institutions was slightly less than one-tenth of the value held by banks, while the value of microloans (loans less than $100,000) held by savings institutions was less than one-fifth the value of commercial bank holdings. Savings institutions held $54.8 billion in small business loans and $25.1 billion in microloans, compared with $551.6 billion and $132.8 billion, respectively, held by commercial banks. 2b1af7f3a8