As electoral rhetoric centered on the importance of pro-business politics heats up, we want to remind our readers that no single business policy exists in a vacuum.
Banking policy plays a critical role in business recovery, of course, but so, too – perhaps surprisingly – does housing policy.
We were reminded of this by Federal Reserve Bank of Boston President and CEO Eric Rosengren after reading through remarks he gave recently at a meeting of the Connecticut Business & Industry Association.
While emphasizing that this recovery has been agonizingly slow, Rosengren noted that the smallest and largest businesses have accounted for the most significant job declines in the past few years. The only considerable job gains have been found at mid-size firms of between 50 and 1,000 employees.
In the majority of previous recoveries from recessions, including after 2001, small firms were a critical source of job gains. The reasoning behind this general trend – Great Recession notwithstanding – is fairly simple: What better time to start a business, many entrepreneurs reason, than at the bottom, when competitors are weakened and fresh ideas more welcome?
We have to believe that today’s entrepreneurs probably feel the same way, and must be dying to get any number of creative and constructive businesses off the ground. But, as Rosengren illustrated, they’re battling forces their contemporaries in 2001 were not.
After prior recessions, and especially after 2001, recoveries were driven largely by improving housing markets. And rising home prices meant more access to home equity loans, a relatively low-cost financing option for entrepreneurs looking to get their venture financed.
Such is not the case today.
“The ability to start a small business in this way has been severely hampered by the decline in house values and the tightening of credit standards,” Rosengren said. “These factors have made the traditional sources of entrepreneurial financing much less readily available.”
Rosengren’s research indicates that while community banks have increased their business lending, the bulk of that growth has come in lending toward mid-size and larger businesses. Additionally, he said, much of it has also come at the expense of larger competitors, as established firms shift their banking relationships to institutions closer to home.
It all leaves small startups precious few places to turn: Large banks are cutting back on business loans across the board, smaller lenders are focusing more on established businesses that are both more lucrative and less risky (and that have collateral, too) and homes are no longer the piggy banks they used to be.
But all is not lost, least of all here in Massachusetts.
Bay State single-family home prices fell “just” 3 percent last year compared with 2010, according to The Warren Group, publisher of Banker & Tradesman. That kind of decline isn’t great news, of course, but it is far better than the 4.7 percent decline in nationwide home values last year recently reported by CoreLogic.
This suggests that Massachusetts entrepreneurs may be given a head start once home values begin to rise in earnest again, giving them more access to those all-important home equity loans and enabling them to begin creating jobs here at home.
Additionally, we’d like to think our local lenders may have a better understanding of the needs of startup businesses than their peers nationwide, regardless of Rosengren’s wider research.
Massachusetts has long been a hotbed of high-tech, biotech and health sciences innovation and entrepreneurship, a tradition our homegrown community lenders have helped nurture and encourage for decades. We don’t see that slowing down – rather, we see it growing.
Nobody said success was easy. But with a little luck, and some sound advice, we think Massachusetts entrepreneurs will succeed this year like never before.
