Small businesses are the engine of the U.S. economy and the cornerstone of our communities. Our favorite restaurant, cherished clothing boutique, local movie theater — these are institutions that are incredibly important to our day-to-day lives. Small businesses, which are those with less than 100 employees, represent 98% of businesses in the U.S. and account for 42 million jobs (33% of private sector jobs).

Prior to COVID-19, small businesses added an average of 1.5 million jobs per year. That’s more than three times the number of jobs created by businesses with more than 500 employees. In the poorest 30 counties in the U.S, small businesses account for more than 60% of jobs.

Despite significant federal assistance, small businesses have struggled amid COVID-19. While federal stimulus has provided a necessary one-time injection to support struggling small businesses, there are three major challenges that small businesses continue to face in accessing the financing they need to resume and sustain their operations.

  1. Lack of small-dollar loans
  2. Exclusionary or inflexible underwriting criteria and processes
  3. Lack of 'portability' between small business lenders 

The pandemic has exposed the underlying challenges associated with the small business lending ecosystem. It has also shined a spotlight on lenders who successfully use alternative approaches to reach underserved borrowers. Here are three learnings for other funders looking to deepen their impact with small businesses:

  • Portfolio performance is robust. Notwithstanding the challenges of the pandemic, small businesses have proven remarkably resilient. Across our cumulative portfolio of approximately 5,000 Texan small businesses, 98% of repayments remain on track.
  • Small business lending is a ladder. The goal is for borrowers to obtain the right amount of capital they need at the lowest possible cost.
  • Trust is the most important currency that a lender can have. The hallmark of a good lender is the trust they can develop within the small business community.

Read the full article about investing in small businesses by Neeraj Aggarwal at the Michael and Susan Dell Foundation.