The Big Small Business Problem

Something is rotten in the state of Capitalism.  Admit it, you can sense that this is the case.

(Sorry, comrades — not everything is rotten.  Just something.  The gearbox works overall, but one of the gears is slipping.)

I. The big problem

You have probably heard about how the Fed has been “printing money,” and that interest rates are historically low.  But small businesses don’t see it that way.[1]
money-printing-press
A major corporation pays 2.3% to borrow (a 5-year “AA” bond).  I pay 2.4% to borrow (a 5-year car loan).  But a small business with $5 M in revenue pays 7-10% for a 5-year loan — that’s three to four times as much — if it can even get financing at all.[2]

No financing for a small business == no growth == no hiring == no jobs.

HOW IS IT RIGHT that the capital flows easier to me to get spinner rims on an Escalade, than for a business to get a lathe or a convection oven or a new retail location?  (Answer: it’s not right.  It’s messed up.)

Cadillac-Escalade4

II. The root cause

(As it happens, the “why” here also goes a long way to explaining the 2007-2009 financial crisis — believe it or not.)

In the 1970s, the credit bureaus (consumer and business) switched over to using computers, giant databases that hoovered up data from banks, credit card companies, mortgage lenders, and other creditors.

UnivacTape2
But because of how consumers and businesses differ, the credit bureaus went on to become extremely good at expanding their breadth and depth on consumers — while remaining very poor at covering small businesses in the US.  As a result, most solvent adults in the US have a FICO score, but almost no businesses have a useable credit report.[3]

That stylin’ 1970s picture above?  It’s not so far from the truth.  The business credit industry still refers to the monthly data that forms business credit reports as the “trade tapes.”  That’s right, tapes, like … reel-to-reel.  Not even 8-track.[4]

Capital — the sheer tsunami-force of Mammon — is mighty, but it is also mighty lazy.  And it flows first where risk is low and information is high.  So the great engine of American finance, turbocharged by the savings of a billion Chinese, sloshed the money into anything with a FICO score stamped on it.  Mortgages, auto loans, student loans, credit card bills — all sliced and diced and rehypothecated because of how easy it is to check the FICO.[5]

CTprospectpoint

But any business too small to have a Moody’s or S&P bond rating was left out of the party.  No FICO == no flood of capital.

WaterlessFALLS

Could it be, that if we’d only been pouring money into productive endeavors like building small businesses, the story of the 2008 crisis might have been different … or never have been at all?

III. Why this matters

So we ended up with a 30-year period where money got cheaper and cheaper, and more and more of it got printed, but it flowed preferentially to the very largest corporations and to individual consumption.  And sure enough, we got what we paid for: large corporate profits and personal consumption expenditures are once again at an all-time high, as a proportion of our economy.[6]

fredgraph-corp_profits

And now we have our McMansions, and our Escalades, and our S&P 500 peaks, but our small businesses remain choked off from capital.

(This is not the only way for a capitalist economy to work or even thrive; Germany, the healthiest economy in all Europe, treats their small businesses differently and it works out for everyone.  In America, small businesses account for about half of jobs; in Germany, it’s 70%.  That difference in the number of small business jobs is enough to completely wipe out unemployment.  No joke.)[7]

IV. What we’re going to do.

SimpleVerity is going to fix the economy.  Since we don’t control the Federal Reserve, the next best thing is to fix the systematic lack of capital for small businesses.  And we’re going to do that by creating a meaningful, useable credit report on every small business in America.

Stay tuned.

Will you join us?



[1] “Small Business…”:
(When we say “small business,” we mean really any company from a couple, up to a couple hundred, employees.  There are about 5.9 million of these.  So, everything from two guys doing consulting, to a thriving specialty manufacturer.)



[2] 5-Year AA Bond yield (as of 2013):
http://finance.yahoo.com/bonds/composite_bond_rates



[3] 75% of US Adults have a credit score (as of 2004):
http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/scores.html



[4] This is an actual quote from an Experian PDF guide:

1) To facilitate faster processing, write the following
information on the external media label:
Contributor Number
Number of Records
Run Date
2) Mail Tapes, 3480 and 3490 Cartridges to:
Experian Information Solutions
Attn: AMC Tape Library
611 Experian Parkway
Allen, TX 75013



[5] “Great engine of finance…”:
(Of course, a vast amount of fraud and freeloading — mostly by brokers and bankers, actually — came along with the legitimate torrent of capital.  When that rot was discovered, we had a financial crisis, and that rot had to be purged.  The underlying structure and the sources of data, though, have not changed.)



[6] Corporate profits a % GDP
http://research.stlouisfed.org/fred2/graph/?g=jKf
PCE as % GDP
http://research.stlouisfed.org/fred2/graph/?g=hh3#
10yT
http://research.stlouisfed.org/fred2/series/DGS10/



[7] “Germany treats their small businesses…”
http://en.wikipedia.org/wiki/Mittelstand
“it works out well…”:
See German’s AAA credit rating, higher than America’s:
http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us

More funding, less crowd: business credit scores for all

Here at SimpleVerity, we’ve recently made an important decision: we’re peeling off from the “crowdfunding” focus, in favor of a broader focus on business funding.  I’d like to take a minute to explain our thinking.

Speaking in rough orders of magnitude, there are 50,000 angel deals per year, and 5,000 venture deals per year.  Both of those are about $10-20 B annual capital flows.  (These numbers swing pretty widely when there’s a bubble or a recession, but those are decent averages.)  Heady stuff.  There’s reason to believe that a mature crowdfunding ecosystem will rival the dollar size, and exceed the deal count, of either angel or VC.

But, in a critical item for consideration for us — crowdfunding is stuck in the regulatory mire.  Some commentators on this very blog are of the opinion that it might never be fully realized under the 2012 JOBS Act as written.  (We are somewhat more optimistic.)  But it became clear as day over the course of summer 2012 that even the preliminary “stepping stones” to business crowdfunding — things like publicizing raises to accredited investors — were dangerous to depend upon as gatekeepers to earning our first dollar.

A company that’s a going concern, adding a new line of business, and can keep the lights on while waiting another month here, another quarter there — such a company could plan to serve that market.  But not a bootstrapped startup needing that first dollar.

Furthermore, market size considerations struck home.  Crowdfunding will get large, we think — though it could take a few years to mature.  Where’s the money at today?  Well, small-business bank lending along is on the order of $700 B in outstanding loans and lines.  And trade credit — the name for when a business ships goods on “open account” and waits for payment in 30 days — is estimated to be 2-3x that number.  So we figure that the dollar volume affected by small-business credit reporting has what we like to call a “T-handle” on it.

We’re clear about our core values: we’re data and finance guys, we hate unnecessary complexity, and we love small businesses.  So we knew we wanted to stay focused on providing data services that help small companies get financing.  That’s why we feel strongly about our current direction: building meaningful business credit reports for the “Fortune five million.”

There’s a lot more to it, which will come out over the next weeks and months.  But we hope you’ll stay tuned to SimpleVerity as we move towards more funding (but less crowd).  And for our friends who are pioneering in the crowdfunding space, bon courage!  We hope to see you again in a prosperous future.