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Cardin: Access to capital still a challenge for small businesses

WASHINGTON, D.C. — Though the lending climate has become friendlier to small businesses than it was at the start of the downturn in 2008, access to capital continues to be the greatest challenge small business face, according to U.S. Sen. Ben Cardin.

United States Senator of Maryland, Benjamin L. Cardin

“Before this current economic downturn, I held many meetings with small businesses … the No. 1 issue they would mention was access to healthcare,” said Cardin, a member of the U.S. Senate Committee on Small Business and Entrepreneurship since 2007, in a recent interview with The Daily Record. “Now with the downturn, it is access to capital.”

Nationwide, there are 21.1 million small businesses — defined as those with less than 500 employees, or with no employees — according to 2009 Census figures. In Maryland, there are 516,398 small businesses, with 409,957 of them non-employers.

“When the economy is soft, as it has been, it’s particularly difficult for small business,” Cardin said. “They don’t have deep pockets, they don’t have the access to capital that larger companies have, so the programs that provide help for small businesses in getting capital are particularly important at this time.”

Those programs — and financial support for small businesses across the board — matter because of the job growth and innovation that comes from small businesses, he said.

Particularly true here

That holds particularly true in Maryland where, unlike in cities such as Houston, New York and Chicago, the economy is driven by small, nimble and often technology-oriented businesses, said Anirban Basu, chairman and CEO of Sage Policy Group Inc., a Baltimore-based economic and policy consulting firm.

“One could argue that [small businesses] are even more important in Maryland than they are in many regional economies because Maryland has lost so much of its large corporate presence over the years,” Basu said.

Nearly all – 97.5 percent — of employee-bearing businesses in Maryland are small.

Small businesses are sometimes aided by the Small Business Administration’s lending programs, which received a boost in 2009 with the signing of the American Recovery and Reinvestment Act. Among other things, the Act increased the guaranty of certain types of loans from 75 or 85 percent to up to 90 percent, a move intended to alleviate some of the fear of lending to small businesses by charging the federal government with a greater percentage of the debt if a borrower defaults.

“So we’ve done a lot of things to make it easier for private banks to loan to small businesses. It’s been better, they’ve improved, but we still have some way to go,” said Cardin, noting the Small Business Jobs Act of 2010’s creation of the Small Business Lending Fund, an investment fund that encouraged lending to small businesses by providing capital to banks with less than $10 billion in assets.

That program, however, wrapped up in 2011, with only $4 billion of its $30 billion fund allocated to community banks.

At the time, Cardin urged “Treasury Secretary Timothy Geithner to reconsider expanding direct lending programs for small businesses since the programs that filter funding through banks do not seem to be working,” according to a statement.

The reasons for the lackluster lending ran the gamut from stringent program requirements that turned away banks that applied — or discouraged others from applying — as well as weak demand from business owners.

While critics of the SBA’s lending programs take issue with providing tax dollars to seemingly risky borrowers who have been turned down by conventional lenders, the issue should not be with the practice, but with the execution and the SBA’s ability to determine where potential lies, Basu said.

“We know that small businesses are capital constrained, particularly those that don’t have much history,” Basu said. “There was once a time when Hewlett-Packard was a small company and Apple was a startup … if we agree that a lot of the jobs are created by small, rapidly growing businesses, then what you want to do is make sure you’re able to finance the good ideas.”

Size vs. age

But more and more, small businesses find themselves in the crossfire of an argument that pits size against age, with economists pointing to the age of a firm as a better indicator for the firm’s job-generating capacity.

“Business startups contribute substantially to both gross and net job creation,” according to a study by University of Maryland economics professor John Haltiwanger and two Census Bureau economists.

The study, published in August 2010, showed that not all small businesses are created equal when it comes to adding jobs. Though small businesses are often touted as drivers of the economy, the study found that the age of a company was a more important factor for job creation. Startups created 3.5 million new jobs in 2005, more than any other companies, according to U.S. Census Bureau data.

But young small businesses aren’t just a sign of promising job creation; they also provide an indication of entrepreneurial climate in an area, said Richard Clinch, director of economic development at the Jacob France Institute of the University of Baltimore.

“It’s a measure of the dynamism of your economy,” he said, adding that small business formation rates tend to increase during times of economic distress, as laid off individuals strike out on their own.

Even if small businesses do not add jobs — Basu said he expects many may not add positions this year — the job-generating importance of a startup shouldn’t be overlooked.

“Often, businesses create jobs by simply coming into existence,” he said.

Burdensome regulations

But the development of small businesses isn’t hindered only by access to capital. Regulations are a burden, and “a small company is very limited in their ability to have individuals who can cope with bureaucratic problems,” Cardin said.

The senator’s efforts at creating a “regulatory environment friendly to small businesses” mirror what is happening in the state. One of Gov. Martin O’Malley’s initiatives has been streamlining the state’s regulatory process.

In his February “State of the State” speech, O’Malley said his administration was presenting legislators with 750 pages of regulations to “reform, reduce and remove from the books,” an effort that was applauded by Ellen Valentino, state director for the National Federation of Independent Business.

The average small business spends $10,500 per year, per employee, in order to comply with federal regulations, according to Valentino.

“We can only imagine that the state costs mirror federal compliance, and the irony of it is that federal and state regulations are duplicative, or even conflicting,” she said.

One reason alleviating those burdens matters is because small firms continue to be the ones that “develop the techniques that are really the innovation of tomorrow,” Cardin said.

That’s something the senator hopes can be further expanded given the six-year reauthorization of the Small Business Innovation Research/Small Business Technology Transfer programs, which are overseen by the SBA and assist small businesses by requiring designated federal agencies to allocate research and development dollars to small businesses.

“Since its inception in 1983, the SBIR has provided small businesses in Maryland with more than $1.5 billion in funding,” according to Cardin’s website.

But the program isn’t as accessible as some local entrepreneurs and small business owners would hope, according to Scott Wohler, chief technology officer and co-founder of Baltimore-based electronic products development firm, NeWo Technologies LLC.

Wohler, who started his company in September 2009 and went full-time in February 2011, said he has applied for SBIR funding multiple times, and found the experience was both “frustrating” and “deflating.”

“The problem with SBIRs is they’re more geared toward sort of academia research, and companies that have been sprung-off from academic R&D initiatives,” he said. “We weren’t in the academic sphere. We don’t have any grant writing experience. Coming at it blind, you need someone who has had [grant writing] experience.”

Technology transfer

Transferring new technologies into jobs and businesses can also be difficult. While the Milken Institute ranks Maryland second in science and technology capabilities, the state falls to 42nd for startups per capita.

O’Malley has made efforts to close the gap, including last year’s creation of Invest Maryland, a venture capital fund that will pump at least $70 million into young, high-tech companies, as well as this legislative session’s proposal to create the Maryland Innovation Initiative, a more than $6 million dollar program aimed at commercializing university research. Both the House and Senate have passed their respective versions of the legislation, and now the bills must be reconciled.

Though it might be overstating to say that small businesses are “the savior” of the economy, “they aren’t unworthy of support either,” said Clinch of the Jacob France Institute.

“They’re important,” he said. “Small businesses become big businesses.”