Chris Masingill: Debt Capital In The Delta Still Difficult

Editor’s note: Chris Masingill, the author of this commentary, is the federal Co-Chairman of the Delta Regional Authority, a federal-state partnership whose mission is to help create jobs, build communities, and improve lives in the 252 counties and parishes in the eight states of the Delta region.

This week, President Obama issued a proclamation that opened, “In America, we believe that anyone willing to work hard and take risks can get their good idea off the ground and into the marketplace. It is a notion that has made our Nation bold and bright and the best place to do business for generations — from small-town storefronts to pioneering startups that keep our country on the cutting edge. This week, we celebrate America’s entrepreneurial spirit, and we recommit to helping our small businesses get ahead.”

Here in the Delta, our region’s economic recovery is dependent on strengthening and growing our small businesses. The DRA Jobs and Small Businesses Report published this past year evidenced that since 1992, locally-owned establishments with 9 or fewer employees have created more than 91 percent of the net new jobs.

To continue to be an environment where our small businesses can both open and grow means to understand the precise nature of the capital access challenges that our “Main Street” businesses face.

The Landscape of Debt Capital
In the past, a business startup seeking capital in the Delta had two primary options – to “bootstrap” using resources such as family, friends, and credit cards or to approach a local commercial bank. Now the ecosystem for business capital has a wide range of new participants – Community Development Financial Institutions (CDFIs), SBA Certified Microlenders, an number of emerging venture capital funds, programs such as USDA’s Intermediary Relending Program (IRP), the New Markets Tax Credit program, angel investors, and crowd funding through programs like Kiva Zip.

In 2011, the CDFI Loan Funds reported $5.8 million in loan activity for urban Hinds County, Mississippi (Jackson), $1.35 million for Shelby County, Tennessee (Memphis), and $1.07 million for Orleans Parish, Louisiana (New Orleans). Unfortunately, the market for these new participants has been uneven. Based on our research, 225 of our 252 counties and parishes in the Delta region received zero assistance from CDFI loan funds in 2011. If you look at SBA microlending and other non-bank sources you see the same answer: gaps in the rural areas of our region are simply not being effectively filled. New suppliers have expanded the landscape of affordable debt capital, yet commercial banks remain the key institutional players in the region.

Challenges
While large corporations are reporting record levels of cash available, a recent study of rural small businesses found that lack of access to capital has been a challenge, particularly for young or start-up firms. Owners of these businesses cited lack of access to capital as a primary barrier to growth and job creation in their community.

In the current climate, “small business owners are reluctant to acquire more debt, lenders are cautious about extending more debt, and regulators are carefully watching the performance of all outstanding debt,” according to researcher Deborah Markley in her briefing Access to Capital in Rural America.  She cited five factors for a decline in capital supply:

• Tightened credit standards on the part of banks
• Weak demand on the part of businesses
• Poor health on the part of banks
• Limitations associated with SBA lending
• Credit gap for some businesses that are not bank or SBA-qualified

In the current economic climate, banks are erring on the side of caution by tightening the credit supply in the face of the greater risk associated with small business lending. The demand for credit has also weakened following the economic downturn, as small business owners are putting off expansion activities like purchasing new equipment, land, and inventory. “The higher transaction costs associated with smaller loans, the tighter underwriting standards particularly on loans secured by real estate, and the nexus of increased collateral requirements coming up against declining collateral values associated with real estate” compound the supply problem, Markley said.

Access
High-quality public services such as fast and affordable broadband are often not available to rural residents and small business owners in the DRA region. These residents and owners may also lack access to consulting and financing support that can be found in the urban areas. Access to basic banking services is an especially concerning problem in the DRA region. According to our research based on Corporation For Enterprise Development (CFED) data, the percentage of unbanked individuals, who must rely on predatory lending such as payday loans and pawnshops, is 50% higher in the DRA region than the national average.

The disadvantages faced by those in rural areas are in many ways offset by unique benefits. Rural regions tend to have significant cost advantages: land, labor, and other critical business inputs are significantly cheaper outside of metropolitan service areas. Also each new business created can have a comparatively larger impact on the local economy. A small entrepreneurial venture can be a big and widely applauded economic development engine. Finally, rural markets can capitalize on industries that are inherently rural in focus: eco-tourism, sustainable food, and alternative energy, among others.

Our Commitment to Increasing Small Business Access to Affordable Capital
The DRA focuses policy efforts toward small business and entrepreneurship in five key priorities:

1) Developing a Pipeline of Educated and Skilled Entrepreneurs
2) Cultivating Technology Exchange and Innovation
3) Improving Access to Affordable Capital
4) Promoting Awareness and Advancing Market Opportunities
5) Optimizing the Regulatory Environment

Recently at the Delta Regional Authority, we released a document that shows our historic investments in the region’s small businesses and entrepreneurs through our commitment to the standards listed above. For a copy of these investments, click here.

All of our small businesses and entrepreneurs echo the best of what the Delta region has to offer: they are innovative, hard-working, and resourceful. With our people and their businesses driving job creation and this nation’s economy, we have a moral imperative to continue to cultivate a vibrant region where our innovators and businesses can thrive.