Small Business Session Summary

Moderator: Kausar Hamdani, Federal Reserve Bank of New York
Discussant: Roberto E. Barragan, Valley Economic Development Center

"Navigating Uncertainty and Growing Jobs: Considering Small Employer Firm Resilience During Challenging Economic Times"
Jean Horstman (presenter), Interise, Colleen Kaman, independent researcher, Christopher Behrer, independent researcher and New Sector Alliance Summer Fellow, Manjari Raman, Harvard Business School, Peter Russo, Boston University School of Management

"Peer-to-Peer Lending to Small Businesses"
Traci Mach (presenter), Cailin Slattery and Courtney Carter, Board of Governors of the Federal Reserve System

"Loan Availability among Small Businesses Operating in Urban Minority Communities"
Timothy Bates (presenter), Wayne State University, and Alicia Robb, Kauffman Foundation

"Community-Based Asset Building: The Role Played by Credit Unions, Cooperatives and other Community-Based Businesses"
Jessica Gordon Nembhard, John Jay College, City University of New York

The economic environment of the last few years has posed numerous challenges to small businesses. This conference panel examined what makes a small business resilient, the trends and costs of peer-to-peer lending, whether tightening credit standards between minority and nonminority urban communities are different, and how community-owned businesses can support the community's economic, social, and environmental capital. The panelists also discussed policies to promote business development, capacity, and creativity.

Using a longitudinal survey and case studies, Jean Horstman of Interise examined the characteristics of resilient small businesses. Resilience is measured by a firm's ability to maintain or expand its workforce and having a strategic mind-set. She finds that a resilient small business effectively uses measurable indicators of internal and external results, assesses strengths and the business environment rather than relying on strategic growth formulas, plans effectively, and adapts and demonstrates creativity under pressure. Her research supports policies that identify and promote organizational capacity of small firms and that develop training programs where small firms can strengthen their skills to manage and adapt to market volatility.

By looking at loan-level data from Lending Club, Traci Mach of the Fed Board of Governors examined peer-to-peer borrowing by small businesses between 2007 and 2012. Beginning in 2010, controlling for the quality of the application and holding all else constant, applications for a small business loan were significantly more likely to have been funded than loans for other purposes. Analyzing only funded applications, Mach notes that funded business loans were slightly larger than loans funded for other purposes but paid similar interest rates. However, comparing small business loans from traditional sources, peer-to-peer small business borrowers pay an interest rate about two times higher. She argues that as small business owners are increasingly turning to this alternative source of funding, policymakers may want to keep a close eye on both levels and terms of such lending.

Focusing on tightening credit standards, Timothy Bates of Wayne State University discussed if firms in minority neighborhoods are treated differently from small businesses located in other parts of urban America. Using Kauffman Survey data, he finds that loan approval criteria applicable to minority-owned firms in minority areas appear to be color-blind. A possible explanation is that the banking industry is being segmented geographically regarding its responsiveness to serving the credit needs of minority clients. Such segmentation might also explain why minority-owned firms located outside of minority neighborhoods are less likely to experience favorable loan application outcomes, as they may be dealing with bankers who are unfamiliar with minority clientele. Further research is necessary to explain differing small-business loan application outcomes among minority business subgroups based on their locations in metro areas.

Jessica Gordon Nembhard of John Jay College, University of New York analyzed community-owned businesses as community assets and how they develop economic, environmental, social, and cultural capital in their members, employees, and communities. Her research suggests that enterprises that develop collective as well as individual financial benefits (such as good jobs, business equity, retirement and other savings, land ownership, affordable housing, and commercial real estate), and positive externalities (such as leadership development, economic and environmental sustainability and revitalization, job ladder mobility, education and training, financial literacy, and civic engagement) are community assets because these impacts extend beyond the individuals who are directly connected with the enterprise. She proposes public policies, particularly at the state level, which promote and support cooperative and credit union development, and community ownership of local small businesses.