'The Truth Behind The Jobless Recovery': Startups Can't Find Funding

Posted on Thursday, January 13, 2011

Even as the nation lacks the jobs to employ millions of workers, one crucial source of job-creation is being squelched: New businesses, which, according to a new study, contribute a fifth of the nation's new jobs, often can't get off the ground.
After years of lax lending policies contributed to the worst economic downturn since the Depression, banks, which offer businesses the loans they need to get going, have adopted stricter standards. But this newly conservative climate, necessary in some ways to prevent another crisis, is also helping to stall a recovery. With banks less willing to take risks, would-be entrepreneurs are hitting a wall. The close relationship between banks and business owners, which drives the economy forward in good times, now poses a threat to recovery.
As a means of healing the national unemployment rate, now at 9.4 percent, business-creation is essential. New businesses contribute a full 20 percent of new jobs, despite the fact that those jobs constitute only 3 percent of the nation's total job pool, according to a study released Tuesday by Bank of America Merrill Lynch, entitled "The Truth Behind the Jobless Recovery." Without new businesses being formed, the rate of job-creation will remain painfully slow.
"Banks are being much more picky," said Sam Thacker, a partner at Austin-based Business Finance Solutions. "A start-up is going to have to prove that they have domain expertise in the field that they're trying to start a business in."
To some extent, this new strictness is beneficial for the economy. Thacker characterized the banks' behavior before the financial crisis as "the wild west of lending," with banks throwing loans at virtually anyone with a business plan and a credit score. But others say banks have learned their lesson too well.
Banks have become stricter at a time when leniency is more important than ever, experts argue. After markets crashed in the fall of 2008, creditworthy borrowers saw their credit scores compromised, sometimes through events they couldn't control.
"The extent to which wealth was destroyed in this recession was dramatic," said Michelle Meyer, a Bank of America Merrill Lynch economist and the new report's principal author. "Balance sheets were hurt quite a lot."
One in seven creditworthy Americans were unable to pay their bills at some point after the financial crisis, often due to a job loss, according to a study released late last year. As otherwise responsible borrowers contend with an isolated credit flaw, credit scores have become an increasingly unreliable measure.
"The world of credit scores has been badly tattered," said Marilyn Landis, president and CEO of Pittsburgh-based Basic Business Concepts. "Much of the information no longer reflects the ability of the individual to pay."
Would-be entrepreneurs have few options. With home prices continuing to fall, it's more difficult to use a house as collateral for a loan. Meyer, the author of the study, described an "adverse feedback loop," in which low home prices make banks less willing to extend credit, which stifles the creation of jobs, which, in turn, keeps home values from climbing.
The jobs situation is plagued by such feedback loops, beneficial in good times and ruinous in times bad. Small businesses are locked in a co-dependent relationship with small banks. Business owners depend on the personal care they can get from their local bank, and local banks depend on loans from small businesses. As HuffPost reported, both parties in this key relationship are keeping each other down.
Much talk in Washington has justifiably been spent on small businesses. The Bank of America Merrill Lynch study estimates that 45 percent of the nation's jobs are at establishments with fewer than 50 employees. By the Obama administration's estimate, small business payrolls contain 70 percent of the nation's jobs. But policies to address the impediments to business-creation are lacking, Meyer said.
"There's been so much focus on small business broadly," she said. "Do you come up with a mechanism to help new businesses start up, or help existing businesses?"
The Huffington Post | By William Alden

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