NC Budget and Tax Center

Community development lenders play key role in promoting small business growth and job creation

Despite the recent improvement in the state’s unemployment rate, North Carolina’s economy is still experiencing only sluggish job creation, needing to generate 532,500 jobs just to return to pre-recession employment levels while keeping up with population growth.  As a result, job creation should continue to remain a critical priority for our state’s elected officials, especially through the support of small businesses, one of the state’s key engines for long-term employment growth.  Between 2005 and 2008, small firms with fewer than 100 employees on payroll created more than 80% of new private sector jobs.

Unfortunately, groups as diverse as the National Federation of Independent Businesses and the North Carolina General Assembly have reported a critical barrier to small business development—too many small businesses lack access to the financial capital necessary for expanding operations and hiring new employees.  And nowhere is this shortage of capital more problematic than in the state’s lower-income communities, according to a recent report by the Support Center, a recently re-branded, nonprofit community development financial institution geared towards increasing lending to small businesses and long supported by the state budget.

According to the report, large-scale commercial banks (those with more than $1 billion in assets) account for the vast majority of loans made to small businesses, but at the same time, small business loans are making up increasingly small shares of these banks’ total asset portfolios.  Moreover, these banks tend to lend to larger businesses, especially those in the state’s higher-income communities, and are significantly less involved in supporting smaller businesses (those less than 20 people) and those located in low-income communities.  The numbers bear this out—the amount of investment by commercial banks is 250% greater in high-income neighborhoods than in low-income neighborhoods.

When seeking loans from traditional banks, many of these smaller firms, and particularly those in North Carolina’s low-income neighborhoods, lack both access to traditional lines of credit and—more critically—sufficient equity to put up as collateral, a necessity for securing most commercial bank loans.  As a result, commercial banks are typically unwilling to take on the risk of lending to these businesses, which in turn hampers the ability of these firms to expand and create jobs.

Community development lenders like the Support Center seek to fill the void left by commercial banks gap by taking on the greater risks associated with lending to very small businesses in the lowest income areas.  Moreover, these community development lenders also provide technical assistance to these firms, helping build their capacity for better business development.  According to the Center’s report, more than a quarter of community development lending occurs in low- and moderate-income neighborhoods, where otherwise access to traditional bank lending would be impossible.

 

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