Small businesses turn to private credit, but overregulation threatens to cut off that lifeline

Small businesses turn to private credit, but overregulation threatens to cut off that lifeline

Small businesses turn to private credit, but overregulation threatens to cut off that lifeline

President Joe Biden speaks at a Rose Garden event to celebrate May 1 National Small Business Week. Alex Wong – Getty Images

Small business financing in the US looks a lot different than it used to. Historically, small business owners had two main avenues: attracting investors or approaching banks for loans. However, the lending landscape has changed, and a growing number of small business owners are exploring an alternative source of capital: a private loan.

Private credit refers to loans granted to enterprises by non-banking institutions. In the past decade alone, the private lending sector has witnessed impressive growth from $400 billion to $1 trillion in assets. Some of the largest private equity firms are expanding their private lending operations, and investors from pension funds to family offices are increasingly investing in the asset class.

Private lending isn’t exactly a new entrant to the financial world, though the application is growing. Beginning in the late 1970s, small and medium-sized businesses used private loans, often when they were ineligible for loans from traditional banks or when they needed more capital than banks could provide.

I’ve heard from small business owners about how a private loan has positively impacted their businesses, employees and communities. To take just one example, the founder and CEO of an early childhood education company recently told me that a private loan allows them to provide employees with better health insurance, retirement benefits, and other benefits.

It also gave him access to experts who gave him guidance on how to scale and manage business challenges. “[Business owners are] hungry for someone to talk to about how to get better and improve our operations. Undoubtedly, private credit and our partners have given us the opportunity to do this.”

Both businesses and investors have shown increased interest, and the impact is clear. In 2022 alone, EY estimates that private credit supported an estimated 1.6 million jobs, contributed $137 billion to wages and benefits, and generated $224 billion for GDP. Small businesses in all 50 states benefit from a private loan. Most importantly, most of them are small businesses with revenues below $100 million.

Not surprisingly, as the private lending industry grows, as with any growing sector, so do calls for increased regulation. In this case, it is important to consider the current environment and the broader impact of industry overregulation on small businesses.

Some critics want to subject private lenders to the same requirements and regulations as banks. These misnomers ignore the key differences between private loans and traditional bank loans, particularly the fact that private lenders do not use customer deposits. provide bank loans. Also, private lenders engage in a number of risk-reducing features inherent in the private loan business model.

It should be noted that investors invest for a long time and cannot get their investment back at once, so there is no “risk of failure” in a private loan. This is partly why the Federal Reserve has recently Financial Stability Report guaranteed the stability of the sector and said that “financial stability vulnerabilities caused by private credit funds appear to be limited”. Federal Reserve Board of Governors researchers also recently found that private equity-backed loans have lower credit risk than comparable PE-backed loans.

Private equity and lending firms are duly regulated by the US Securities and Exchange Commission (SEC). Private lending firms generally must be registered with the SEC, subject to SEC on-site examinations, comprehensive compliance programs, and regular reporting of asset and business information to the government, among other requirements.

Elected officials on both sides of the aisle can likely agree that private credit is an important resource for America’s small businesses. Small businesses need more access to capital than not. Washington should embrace the ways in which industry provides them with financial stability and encourage the flow of capital from investors to American businesses. Policies should ensure access to credit and not impose unnecessary regulations and barriers.

The consensus among many in the financial sector is clear: the system, as it stands, is serving its intended purpose. Banks continue to lend. Meanwhile, private equity investors lend to businesses that don’t qualify for those loans or need additional support. This sector is not just an alternative form of investment for small businesses, but the basis for their stability and ability to grow.

Drew Maloney is president and CEO of the American Investment Council (AIC), a leading advocacy and resource organization created to inform and advance the private investment industry and its contributions to the long-term growth of the US economy and retirement security. American workers.

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