Credit, Risk, and Succession: Three opportunities to better support small firms

Last week we hosted a virtual faiVLive event sharing early findings from Small Firm Diaries USA, with three panelists who work with small firms from different angles: a CDFI lender, a national policy expert, and a city government program lead. The conversation raised three places where small firms could use better and more tailored support. 

1. The credit problem is shifting from access to quality

The landscape for small business credit has shifted in the last decade. “There is less of an access problem than there used to be,” observed Joyce Klein, who directs the Aspen Institute's Economic Opportunities Program and chairs the SFD USA Advisory Board. “There's more of a 'people are accessing bad products' problem." The proliferation of non-bank lenders, including merchant cash advance providers and platform-linked financing, has made it faster and easier for small business owners to get credit. But those products often lack transparency, don’t disclose APR the way consumer loans are legally required to, and lead businesses to use short-term financing for long-term needs.

Tonya Rapley, Director of Strategic Partnerships at Access to Capital for Entrepreneurs (ACE) , Georgia’s largest CDFI, offered evidence to support the proliferation of poor-quality credit: 30% of ACE’s lending last year went toward refinancing predatory debt, helping businesses escape costly terms and secure more affordable capital. The challenge for lenders like ACE and other CDFIs is that they’re competing against well-funded lenders operating in a legal grey area, whose selling point is speed and simplicity. For time-constrained small business owners who have heard "no" many times when applying for credit, a fast yes can be hard to resist.

Part of why owners keep ending up with poor-quality credit products is that the underlying need is harder to match than it looks. Joyce raised the concept of permanent working capital—which echoes what we’ve seen across the global SFD research, and even more so in the US data. On the surface the need appears short-term, but it’s actually ongoing. 

Some of this is starting to be addressed at the program level. Sherri Lane, Assistant Commissioner for Capital Access and Business Programs at NYC Small Business Services, described a recently launched product called NYC Future Fund, designed for businesses that need payments that move up and down with their cash flow rather than a fixed monthly schedule. For the most part, though, businesses try to meet the need for permanent working capital with short-term financing, since that's what's on offer. The result, in Joyce's words: they end up “paying every cent they make to somebody who's providing them with high-cost financing.”

2. Beyond credit: risk protection and labor disruptions

A narrow focus on access to credit can obscure other pressures these firms face—pressures that aren't solved by more credit. Many small business owners and workers rely on ACA exchanges for health insurance, Joyce noted, and changes to the subsidies could affect what they can afford. She also raised concerns with the broader insurance market: markets are difficult to understand, prices are rising, and natural disaster coverage is full of gaps that small firms only discover after the fact (a business might have flood insurance, for example, only to learn that wind damage to the roof isn't covered). Some of these are places where "we just need a policy fix," Joyce argued—it’s not reasonable to expect small firms to navigate this complexity on their own.

Immigration enforcement is another growing pressure. Some sectors—construction, landscaping, daycare, home care—are seeing real disruption, both from enforcement activity and from workers' fear of being out in their communities. Joyce singled out home care, where many workers are Haitian nationals with Temporary Protected Status. If TPS protections are rolled back, those workers lose authorization to work, and the small firms that depend on them lose a substantial part of their workforce.

3. What 'succession' looks like when most owners don't sell

Most small businesses don't end with a sale or a transfer. The owner walks away, and the value built over years—in customer relationships, processes, and community ties—disappears with them. The panelists each addressed a different facet of this problem.

Tonya noted that many of the business owners ACE works with built their firms out of necessity, not with an exit in mind, so they don't know how to think about business value over time or what it takes to make a business sellable. “There isn't a desire gap. There's usually a knowledge and network gap," she said. ACE responds by offering education on bookkeeping and valuation, and matchmaking between owners ready to sell and aspiring buyers trained alongside them.

At the same time, Tonya pointed to a limit on what better planning can do. Before joining ACE, she ran a professional services business, which she described as "not built to exit, because once I exited the business, I was taking much of the value with it." Some small businesses aren't easily transferred regardless of how well the owner plans, because the value lives in the owner's relationships, expertise, or labor. While better exit planning can help the businesses that can be sold, it doesn't change the share of businesses that can't.

For some of those businesses, alternatives are emerging. Sherri pointed to the worker cooperative model, gaining traction in New York City and elsewhere. Owners pass the business to their employees, preserving the enterprise and its place in the community while giving workers an ownership stake.

Joyce raised a different kind of concern: not about how owners exit or what alternatives exist, but about two assumptions that underlie much of how the support ecosystem thinks about small business ownership in the first place. The first is that businesses are primarily asset-building vehicles whose payoff comes through eventual sale or transfer. In practice, she observed, "most small businesses create a business, generate income from their business, and use that income to invest in other wealth-building opportunities. They send their kids to college. They buy a house. Sometimes they save for retirement." For most owners, in other words, the wealth is built during the business's life rather than extracted at the end. 

The second assumption is that businesses not built to grow or sell are "lifestyle" choices. People start businesses for substantive reasons, Joyce argued: because they think they can do better than the boss they're working for; because they need flexibility for caregiving; because they've come out of the criminal justice system and face employment barriers; because they're immigrants whose credentials aren't recognized in the US. "I don't really see that as a lifestyle choice." 

The conventional support frame around exit assumes a kind of business—and owner—that often doesn't match the small firms we're studying. Better support for these firms starts with seeing the full picture: not all businesses are built to be sold, employee ownership can preserve what selling can't, and the wealth small business ownership creates is often built along the way, not at the very end.

A recording of the panel is available here. Reach out to project manager Tracy Cole (tracy.cole@nyu.edu) with questions or feedback.