From Bloomberg Businessweek: What We Don’t Know About Small Business Lending
The 2008 crisis has shed some light on many problems with our financial system that have been either hidden or ignored. One of those problems is that we simply don’t have enough information about mid-market and small businesses.
The bailouts were designed to free up credit, in part, so small businesses could continue funding their operations and stay solvent. Most recently the Obama administration passed a $30 billion plan giving capital to banks and incentivizing them to lend to mid-market and small firms. The good intentions of these programs, however, are being hindered by a very serious problem: we don’t fundamentally understand why small business lending is down. Liz Warren, who oversaw TARP, makes the point that “Policy makers are flying blind” because the data on small business lending is so inadequate. Without an understanding of WHY lending is down, it becomes very difficult to track whether the proposed solutions are creating any improvements.
While this article is more focused on the lack of understanding about how mid-market and small businesses are using credit, it highlights a larger issue: there is a lack of general knowledge about these companies. The “flying blind” comment can be applied to more than just policy makers. Lenders who are trying to manage risk in their mid-market and small business loan portfolios have the same issues. There are no relevant benchmarks to which a lender can compare their portfolio; actively managing portfolio risk becomes nearly impossible without the ability to compare and understand trends. The WAIN Street Business Credit Health Index (BCH Index) can provide this benchmark. It can fill the information gap by giving both policy makers and lenders more complete data and additional insight into the relative risk of these companies.