Can Big Business Help Small Business Break Through the Credit Crunch?

Starbucks, Chevron and IBM have recently announced programs that give small and mid-size businesses access to capital.
Ghostwriter: The Open Organization, Red Hat
October 19, 2011

Tired of waiting for the government and banks to act or, perhaps sensing an opportunity, big business has stepped in to tackle an unusual opponent: the credit crunch. Specifically, several big companies such as StarbucksChevron and IBM have recently announced programs that give small and mid-size businesses access to capital they can’t seem to otherwise get these days.

What these big companies seem to have recognized is that the economic doldrums of the past few years have taken a toll on small businesses that, in many cases, are their customers and suppliers, says Mark Pinsky, chief executive of the Opportunity Finance Network, a network of some 180 Community Development Financial Institutions, private financial institutions that provide loans to under-served communities and markets. “This can have a corrosive effect on the entire business infrastructure,” says Pinsky, whose Philadelphia-based organization has partnered with Starbucks on its forthcoming program called CreateJobsforUSA.org, which will solicit donations from customers visiting any of the 6,500 Starbucks stores beginning November 1, 2011, and then redistribute the funds to its network of lending institutions across the country. “It can be a very positive thing when everyone, large or small, recognizes that we are in this together and that we need everyone else to succeed,” adds Pinsky.

In truth, the companies announcing such programs are mainly supporting them with their brand and advertising reach—not their money (though Starbucks is planning to seed the CreateJobsforUSA.org fund with $5 million of its own money). These bigger companies rely instead on partner companies who specialize in lending to businesses to actually hand out any money.

Starbucks choice of a partner is telling because alternative lenders like CDFIs have continued to aggressively lend to small and mid-size businesses over the past few years as the bigger banks have pulled back, says Rohit Arora, CEO of New York City-based Biz2Credit, which connects small business owners with 400 lenders, credit rating agencies and service providers. “The Starbucks initiative is well-meaning because it supports the community banks, who are the only ones lending these days,” says Arora, who—based on his firm’s most recent Small Business Lending Index, which analyzes 1,000 recent loan applications—points out lenders like CDFIs approved some 61.5 percent of loan applications in September, compared to a 9.2 percent approval rate for big banks for the same month.

Shaw Canale, CEO of Mountain BizWorks, a nonprofit CDFI in Asheville, North Carolina, that hopes to receive some of the money raised by the Starbucks program, cautions that raising money is only half of the equation when it comes to addressing the country’s No. 1 issue: job creation. “What we don’t want to do is just lend $15,000 to someone to start a small business that creates a low-wage job for him or herself,” she says. “If we can also use that money to help an existing mid-size company increase its employment, then that’s a good use of those dollars.”

To Canale’s point, established small and mid-size businesses, or SMBs, report being particularly hard hit when it comes to landing lines of credit, which they previously relied on for everything from making payroll to buying inventory or investing in software or equipment. That helps explain, at least in part, why a company like IBM has stepped into the gap by announcing a $1 billion financing program that will give qualifying SMBs the ability to purchase IBM products and services through its network of providers for rates starting as low as 0 percent for the first 12 months. “Small and mid-size businesses are absolutely critical to innovation and economic growth,” says Ed Abrams, a vice president of SMB marketing at IBM. “But access to capital and credit can be challenging for these businesses, so we’ve stepped in to provide the kind of financing that can support that growth.”

While the announcements made by Starbucks and IBM might indeed note a growing trend where big companies help alleviate the credit crunch somewhat, not everyone is quite ready to anoint such companies as lenders of choice for SMBs.

“Many of these community-lending initiatives are pilot programs and there really isn't enough data to show what percentage of small businesses are benefiting from loan funding this way,” says Ian Aronovich, co-founder and CEO of GovernmentAuctions.org, a site that compiles and provides information about government auctions of seized and surplus merchandise from all over the country. “Clearly all this is good for public relations and media attention, but its unclear how helpful this will turn out in reality.”

But Jeremy Gregg, executive director of The Plan Fund, a CDFI in Dallas, puts a much more positive spin on the hubbub. “I see no issue with big corporations getting involved in lending,” he says. “If they are using it to get good press, all the better. Perhaps it will inspire other companies to do the same. In this climate, we need all the investment in small business that we can get.”

 Would you ever choose to receive funding from big business?

Ghostwriter: The Open Organization, Red Hat