Opinion

Boosting Small-Business Investment Requires Simple Regulatory Reforms

Tax reform is intended to provide long-needed relief to small businesses that require more capital, but when it comes to ensuring that they get the financing they need to grow, tax reform is not an end unto itself. Modernizing the regulations that govern how small businesses can access credit is a necessary complement to tax reform and could send a surge of new investment capital to small businesses struggling to access funds from traditional lenders.

When small businesses were having difficulty accessing capital from commercial banks and traditional financing sources 37 years ago, Congress pieced together parts of securities regulations dating back to the 1930s and created business development companies, or BDCs, a unique, hybrid lending vehicle — half operating company, half investment fund — charged specifically with financing small and mid-sized businesses that otherwise would have limited financing options.

After the financial crisis, according to the Institute for Local Self-Reliance, many of the local and regional banks that were once the primary source of funding for small businesses either closed down or merged with larger institutions. Those that were left reduced their small-business lending by more than 40 percent.

In the past 30-plus years, BDCs have played a pivotal role as a capital provider to small businesses by providing over $80 billion in financing for Main Street companies. For example, in the past year we have financed a designer and direct marketer of girls’ apparel, which provides opportunities for caregivers to re-enter the workforce on a flexible schedule. Our support of this company exemplifies not only how BDCs provide financing for small-business growth, it is also an example of how a BDC can partner with regional banks to provide a full capital solution for a company.

Given BDCs’ increasingly important role in fueling small-business growth, it is imperative that Congress update our regulatory framework by putting them on equal footing with other investment vehicles. BDCs often take the place of banks but are currently subject to much more restrictive capital requirements. For every dollar’s worth of assets a BDC owns, it may only borrow $1. Banks, by comparison, are typically allowed to borrow up to $10 for every dollar of assets they own, and Small Business Investment Companies, which function similarly to BDCs, are permitted to borrow $2.

Limiting BDCs to 2:1 asset coverage over debt substantially restricts the amount of capital we can make available to small businesses with limited financing options. Giving BDCs leverage limits similar to small-business investment companies would not cost taxpayers anything but would almost immediately expand the amount of investment capital accessible to small businesses.

In addition, the existing regulations subject BDCs to disclosure and reporting requirements originally designed for risky investment funds, but they deny BDCs the regulatory relief lawmakers extend to established public companies. For example, small operating companies are permitted to file Securities and Exchange Commission disclosure forms that merely reference previously filed reports as opposed to having to compile and send full copies with each filing.

Treating BDCs the same as other small operating companies would allow them to operate more efficiently and with less expense, benefiting not only BDC shareholders, but also the small businesses BDCs finance.

Small businesses are the foundation of the U.S. economy and account for more than half of net new private-sector jobs. Modernizing BDC regulations can significantly impact the economy and provide more capital to small businesses.


Sabrina Rusnak-Carlson is the general counsel for THL Credit Inc., a founding member of the Coalition for Small Business Growth.

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