3 Challenges Facing Small Business Growth

It’s no secret that small businesses are the best sources for creating new jobs in the US. However, limited and tightened access to credit, tightening restrictions on US …

It’s no secret that small businesses are the best sources for creating new jobs in the US. However, limited and tightened access to credit, tightening restrictions on US visas and reduced diversity in angel investments are all significant roadblocks that are limiting small business growth in the US. See the following article from The Street for more on this.

Companies more than a year old lose a combined average of 1 million jobs a year in the U.S. New firms add a combined average of 3 million jobs.

So says a report by the Kauffman Foundation, which included information from 1977 to 2005.

“If you really want to have a jobs agenda, then put money into expanding capital for startups,” says Tom Ruhe, director of entrepreneurship for the Kauffman Foundation. “Without dispute, that is the job-creation engine in this country.”

Yet, several factors stymie startups:

1. Small-business lending remains tight

Bank loans to small businesses dropped from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to the Federal Financial Institutions Examination Council.

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“The biggest problem for [new businesses] is getting money,” says Dave Ratner, owner of Dave’s Soda and Pet City, a small chain of pet supply (and soda) stores in Western Massachusetts. “Banks are absolutely not lending money unless you’re so credit-worthy that you don’t need the money.”

The Small Business Administration subsidizes loans for thousands of applicants who might not otherwise receive them, but those loans have dropped off in recent months, due to lack of stimulus money. Furthermore, all SBA loans require a personal guarantee, usually in the form of a large asset, from any applicant who owns at least 20% of the small business. Critics argue that this requirement can deter applicants, especially in a recession.

“At a time when a lot of Americans are worrying about losing their homes, how can you expect them to put up their house or their 401(k) as collateral?” Ruhe says.

The SBA argues that, subsidized or not, issuing loans without requirements is not a realistic business practice.

“You can’t start a business and expect everyone else to take all the risk,” says Michael Stamler, a spokesman for the SBA in Washington.

2. Immigrants can’t start companies if the U.S. kicks them out of the country

The nation’s top university labs are full of non-U.S. citizens whose research could yield myriad technology startups. In fact, immigrants founded 7,000 technology companies between 1995 and 2006, according to the Kauffman Foundation.

During that time, about 25% of tech companies in the U.S. had founders from other countries. The problem is that while foreigners have good luck acquiring student visas, the visas run out once they stop being students and start starting companies. The U.S. offers a visa for foreign investors, the EB-5, which requires a business investment of at least $1 million and the creation of at least 10 jobs. But the EB-5 is little solace to entrepreneurs whose businesses are too new to be profitable, but who want to stay in the country to make that first million bucks.

“If we had our way, for every foreign-exchange student that graduated with an advanced degree in science, education or math, we’d staple a Green Card to their diplomas,” Ruhe says.

3. Angel investors are getting cliquey

In headier times, angel investors were wealthy individuals who provided initial capital for all sorts of startups. These days, a lot of angels are pooling their resources into group funds, which decreases the variety of investments.

“They used to be risk takers taking a chance on something that was early-stage and promising,” Ruhe says. “What they’ve done is started syndicating and acting more like mini-me’s of VCs.”

This article has been republished from The Street. You can also view this article at
The Street, an investment news and analysis site.


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