As Prepared for Delivery on September 19, 2023
Why Small Business Matters
Thank you very much for that kind introduction. It’s my pleasure to join you all today, and what a wonderful time of year to visit Savannah. I certainly hope everyone gets an opportunity to get out and take advantage of all the city has to offer.
But because this is a business services conference, it’s appropriate that we should at first focus on the business at hand. And that means focusing on the important role credit unions play in supporting and nurturing our ecosystem of small business enterprises.
This issue is close to my heart because it takes me back to the beginning of my career, when, in my very first job in the financial services industry, I served as a Community Reinvestment Act officer with a bank in my native North Carolina. Part of that job entailed working with entrepreneurs and small business owners to target investment where it would have the most impact, which was tremendously rewarding. Moreover, it was excellent training for the work I would do in later years as a regulator, as it helped me to better understand both the importance of small businesses within those communities and what they needed to thrive.
We all recognize the importance of small business and entrepreneurship to our economy and job creation. According to the Small Business Administration (SBA), the United States is home to some 33.2 million small businesses employing 61.7 million workers (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) — that’s just over 46 percent of the U.S. workforce. The SBA also notes that small businesses generated 12.9 million net new jobs over the last 25 years, accounting for about 66 percent of job growth in that period. That means that for the last quarter century, small business has been our nation’s primary engine for hiring and training new workers.
Similarly, we all grasp the importance of small businesses to building and sustaining strong communities. If you look at a town, city, or county with a diverse network of strong-performing small enterprises, you’re very likely going to see other positive indicators like more home ownership, better schools, and a strong sense of community pride. Those communities are likely to be a good deal more resilient in the face of economic change, as opposed to communities dependent on a smaller number of large enterprises and employers. Meanwhile, those small businesses are also likely to give back to that community, in the form of supporting local initiatives, philanthropic giving, volunteerism, and so forth. Those are other powerful reasons to nurture and encourage the small business sector.
Moreover, entrepreneurship and small business ownership are critical for advancing financial inclusion and economic mobility. If you’ve heard me speak before, you may know that financial inclusion has been a priority for me throughout my career in the private sector and in government service, particularly in the last few years as I’ve been serving my second term on the NCUA Board, where I’ve placed it at the center of my agenda.
I’ve described financial inclusion — that is, making access to quality, affordable financial services more widely available to help individuals and families climb the ladder toward greater financial security — as “the civil rights challenge of our generation.” I’ve also urged financial industry leaders to lead the way by making this a priority because I believe the industry can play an effective role in widening that circle of inclusion.
I want to emphasize that when I talk about financial inclusion, this isn’t to be confused with philanthropy or charity. What we’re talking about is a form of empowerment, giving people the tools they need to build wealth and flourish. And when we think of financial inclusion as a form of empowerment, it becomes much clearer why support for entrepreneurship and small business is essential.
At the same time, we all recognize that starting a business is a difficult undertaking. Getting access to start-up capital and credit is a stumbling block for many people. We can add to that challenge a complex regulatory environment that can often be difficult for small enterprises to navigate, along with lingering inflation and supply chain issues, labor shortages, health insurance, and taxes, and so on.
And then there are the fundamental challenges of acquiring and retaining customers, processing payments, formulating long-term business plans, and the other myriad realities that come with running your own enterprise. When you consider all those potential obstacles, it’s remarkable that anyone is willing to take up that challenge. And yet people continue to do so every day, which must be a powerful testament to our faith in entrepreneurship and the American dream.
So, anything we can do to help to encourage and nurture the commitment to entrepreneurship and make it possible for small businesses to succeed, is going to be a plus for growing the economy, strengthening our communities, and broadening the circle of financial inclusion. I’d like to talk now about a few ways we can strengthen that commitment to entrepreneurship to encourage the next generation of small businesses that we want and need.
Creating A Nurturing Environment for Entrepreneurship
Because I’m a regulator, I’ll begin with the government’s role because I believe that one important place to focus on is ensuring that the legal and regulatory environment is conducive to entrepreneurship and small business formation.
I’ve described my vision of the regulatory system as “effective without being excessive.” And if you look at what we’ve done at the NCUA over the last few years, we devoted a lot of attention to common-sense rule changes that would give credit unions the flexibility they need to serve their members best, and many of which were aimed at providing greater support for small business.
So, for instance, while I was serving as chairman from 2019–2021, we forged a partnership with the SBA to share information about small business opportunities. We issued new regulatory guidance on how credit unions could provide services to hemp-related businesses. And, I’ve been vocal in calling for reform of banking laws to allow cannabis-related businesses access to legitimate financial services.
As Chairman, I also pushed to launch the ACCESS program, which includes a strong focus on entrepreneurship. I also made diversity, equity, and inclusion a top priority to ensure that under-served and marginalized communities were receiving the services they need.
My successor as Chairman, Todd M. Harper, and the NCUA’s Vice Chairman, Kyle S. Hauptmann, have also been providing great leadership on the critical question of chartering more credit unions. That’s an issue on which the entire Board is in agreement with and have been making progress. More credit unions mean more competition and opportunities to extend small business lending into communities, so we’ll continue to encourage that expansion.
These are just examples from the NCUA and the credit union world, as that’s my area of experience and expertise, but I know other executive agencies are looking at similar issues. And, of course, Congress should be playing a critical role in this effort by focusing on legislation to encourage more entrepreneurship and small business formation.
So, the government has a vital role to play in nurturing and encouraging entrepreneurship, but the private sector financial industry also should be playing an important role. However, we should be concerned that small business lending isn’t at the level we’d like to see. According to a Bureau’s survey of entrepreneurs, almost two-thirds of entrepreneurs rely on personal and family savings to launch their businesses. Only about 16.5 percent of small businesses obtained business loans from banks or other financial institutions. These findings suggest that there’s a growth opportunity for lenders who are willing and able to work with these entrepreneurs.
Unfortunately, lending to small enterprises took a hit in the 2008 financial crisis and afterwards and never fully recovered to its previous levels. Moreover, the pandemic took a heavy toll on the small business sector, and while government initiatives like the Paycheck Protection Program helped to contain the damage and recovery has been robust, we still have a long way to go to get back to a healthy lending environment.
I’ve encouraged credit unions to look carefully at how they can enhance lending to small businesses and offer greater support to entrepreneurs in their communities while of course, always taking care to manage their risks to ensure the safety and soundness of their institutions.
In fact, credit unions and small local banks are particularly well-positioned to support small businesses because of their strong community orientation. This is where smaller institutions have a tremendous advantage because they understand so much about local market conditions in ways that can help them steer investment and credit where it might make the most difference. That difference counts for a lot.
I hear these stories constantly in my travels around the country visiting with credit union leaders and members. Just last week, someone shared with me the story of a couple of young African American entrepreneurs in Louisiana who started a private security company, and they were struggling until they got their first big break: a contract to provide security at the Super Bowl. They belonged to the local postal credit union, where they got the $100,000 loan they needed to hire and train personnel for the job, and that set them on the glide path to becoming a company with operations in four states and almost 200 employees.
This brings me to my third point, which is the promise of financial technology, which I believe has great potential to help credit unions and other financial institutions to streamline and enhance their service models, including small business lending. I used to say that fintech was “the future of financial services,” but I’ve retired that line because the field has advanced so rapidly in a short time that it’s more accurate to describe it as “the present of financial services.”
Fintech providers are already making a strong play in the small business sector when it comes to payment processing, accounting, customer engagement, e-commerce – and yes, even steering needed credit and funding to small enterprises. I’ve encouraged fintech providers and credit unions to explore ways to work together because I believe there’s a tremendous potential for a mutually beneficial partnership: credit unions would benefit from the innovation and efficiency of these new technologies, while fintech providers would benefit from credit unions existing regulatory compliance regimes and large base of members. I think that productive partnership could also extend to improving support for entrepreneurs and small businesses, so I hope we have some fintech representatives at this conference with us today who can talk to us about how we can work together to achieve that.
The Small Business Renaissance
I’ve spoken a lot about the challenges and obstacles that small businesses face. However, I don’t want to paint an overly dark and negative picture. So, I’ll borrow a line from the songwriter Johnny Mercer, a notable native of Savannah, who encouraged us, in one his most famous songs, to “Acc-Cen-Tchu-Ate the Positive.”
Because the reality is that there are good reasons to be optimistic about the future of small business, and here’s why: there remains a remarkable, seemingly unquenchable, faith in entrepreneurship in our culture and society. I might even suggest we’re due for a small business renaissance, which means there may be great opportunities for those who are prepared to follow their entrepreneurial impulses as well as for those who provide them the capital they need to launch and grow their businesses.
For instance, just last year, one national poll found that 60 percent of teenagers said they would prefer to start their own business (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) instead of working a traditional job. At the other end of the spectrum, we also see a remarkable number of small businesses launched by older Americans. The SBA has dubbed them “encore entrepreneurs” (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) — people in middle age or older with a wealth of career experience behind them who are starting new enterprises. There’s a lot of diversity in this area: It might be a recent retiree who starts a small online venture to generate additional retirement income or someone launching a full-scale business as the next chapter as the capstone to a successful career.
We have military veterans, women entrepreneurs, immigrants starting their small businesses – the list goes on. It does seem like if there’s one thing that unites us in these polarized times, it’s an abiding faith in entrepreneurship and the American dream. That faith certainly bodes well for the future of entrepreneurship if we could harness and direct that energy.
But we must face the reality that it’s hard out there for entrepreneurs and small business owners – they can’t do it alone, so we need to make a strong commitment to do what we can to support them. I’m not talking here about the standard issue of lip service that people pay to small businesses. I mean a real commitment backed by action. That’s why I’m so encouraged by the work that the people in this room are doing to turn that commitment into action, and I look forward to working with you in that effort.
Thank you so much for the work you’re doing, and please let me know what we at the NCUA can do to make your job easier.