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Remarks by Governor Edward M. Gramlich
Before the BusinessLINC and Small Business Technical Assistance Conference,
Washington, D.C.
September 15, 1999
It is a pleasure to address the BusinessLINC conference this afternoon. There have been
many successful link projects between financial institutions and small business, and this
conference should be instrumental in publicizing these successes to a wider audience.
Before getting into questions of small business growth, let me focus on the big picture.
Growth of all American business, small and large alike, depends on a healthy economy. This
in turn is promoted by sound fiscal and monetary policies. For fiscal policy, this means
continued efforts to preserve at least a part of the budget surplus to contribute to national
saving. For monetary policy, it means continued efforts to stabilize prices and to keep
unemployment as low as possible consistent with stable prices. For the past few years,
policies have been sound in this sense, and it is important to maintain this posture.
Small Business and the Economy
Turning now to the topic of the conference, small businesses are extremely important to the
health of the United States economy. There are approximately twenty-three million small
businesses in the United States, representing more than 99 percent of all firms. Collectively,
these firms generate almost one-half of the sales revenues of all U.S. companies and employ
more than half of the private-sector workforce. Small firms provide the first job for an even
higher share of the nation's workforce.
Small firms also are often at the leading edge of technological innovation, fostered by a
competitive need to experiment with new ideas and product development. The Small
Business Administration (SBA) has estimated, for example, that small businesses help
generate almost half of all the innovations in our economy and provide nearly 30 percent of
our high-technology jobs.
The vigorous small business community makes the American economy more flexible,
enhancing our capacity to respond to the fast pace of change in an increasingly
technological world marketplace. Most of our largest, multinational corporations depend on
a vast array of reliable, agile suppliers that help make possible and help maintain America's
competitive position in international markets. A healthy, growing small business sector
makes our economy more nimble, better able to respond to new market trends and needs,
and ultimately more productive as the results of small business experimentation and
innovation weave their way throughout the wider economy.
Small businesses also contribute to local community and economic life. It is at the local
level that the often rough and risky game of small business development, job creation,

innovation, and productivity improvement plays out. Businesses are created, merged,
dissolved, or often simply fail. It is here that small retailers, service providers, and suppliers
get their start and provide employment opportunities--often the first jobs for many--for
workers with a broad range of skills and experience.
It also is at the community and neighborhood level that the process of family and
community asset-building takes shape and where entrepreneurship leads some, literally, out
of poverty. In poorer neighborhoods and communities, small business development provides
everyday retail and commercial services and employment opportunities. The development
and growth of small firms at the neighborhood level often contribute to community
revitalization, help stabilize real estate values, and provide impetus for additional
investments by business, government, homeowners, and homebuyers. Local entrepreneurs
often become valued informal community resources or leaders in more formal civic and
political organizations. In many communities, they represent the heart of the way that local
economic vitality is created and maintained.
Financial Institutions and Small Business
Given their contributions to our economic life, both nationally and locally, it is not
surprising that many traditional financial institutions view the small businesses sector as a
primary market for their loans and financial services. For community bankers, the small
business market is their staple. Virtually all of their commercial loans are small business
loans, and their small business customers also yield deposit, mortgage, financial counseling
and, more recently, insurance and investment relationships.
Many of our larger financial institutions serving both regional and national markets have
developed highly aggressive marketing programs and new loan products and services for the
small business market. Taking advantage of economies of scale and new technologies, such
as credit scoring, many larger institutions have developed the capacity to make smaller
credits available using processes not unlike those used in consumer lending. Specialized
units within large banks can now offer products and services tailored to the highly diverse
small business market--very small loans based on credit scores and limited underwriting;
term loans, with or without third-party guaranties; asset-based loans; and various forms of
equity financing for rapidly growing small companies.
The competition for small business loans and services also has been spurred by the growth
and diversity of nonbank lenders, from companies as large as GE capital to small
community-development financial institutions and microloan networks that feature
revolving loan funds and intensive technical assistance for very small firms.
Other Financial Assistance Programs
Given the importance of small businesses to our economy and our communities, it is hardly
surprising that a broad array of other financial and technical assistance programs have been
created to foster small business growth. In the early days, economic developers, which
included utilities as front-line participants, focused on the development of public facilities as
an impetus for business expansion. "Build it and they will come" was the operative small
(and large) business development scheme. To expand their customer base, utilities often
employed economic development professionals to work with smaller firms as well as larger
industrial companies.

Later, loan guarantee programs at both the federal and the state levels were created to help
private lenders reduce risks, especially those associated with longer-term loans to small
firms. State-administered tax-exempt revenue bond programs provided lower-cost, longterm credit for small businesses. In recognition that longer-term credit was often
insufficient, various equity grant and technical assistance programs were created. These
include the programs of the Economic Development Administration, the Appalachian
Regional Commission, the Community Development Block Grant program and, more
recently, federal and state enterprise or empowerment zone programs.
Additionally, over the last decade, a seemingly disparate group of nonbank small business
finance organizations has evolved into a significant industry. This group includes
community and neighborhood-based nonprofit groups with revolving loan funds, quasipublic economic and business development corporations, SBA-regulated certified
development companies, multi-investor private-sector intermediaries, small business
investment companies, and microenterprise finance organizations. Collectively, these and
other types of organizations provide virtually every kind of financing a small business might
need: microloans, short-term working capital, long-term loans, asset-based loans, loans for
start-up operations, and various forms of equity financing.
Finally, a number of educational, training, and technical assistance programs are offered for
new and experienced entrepreneurs, operated by many of these nonbank groups and
specialized technical assistance providers. These may include SBA- and universitysponsored small business development centers, a variety of federal and state funded
programs, microenterprise assistance organizations, community development financial
institutions, and small business trade associations.
Linking Small Business with Appropriate Assistance
This multiplicity of approaches, resources, and tools for assisting small business
development reflects our diverse economy and, perhaps, an American penchant for
competition and alternatives. But for a small business seeking credit and advice, this diverse
system can become a confusing maze of financial institutions and entrepreneurs. Small or
start-up firms in economically distressed areas may never have heard of the SBA, small
business development centers, or the local microloan network. They may have a business
idea, perhaps some small savings or a credit card or second mortgage, and in the spirit of
entrepreneurship, they start up, making key decisions for which they may be unprepared.
Finding ways to help small businesses navigate this environment successfully is a
considerable challenge, both for financial institutions and for the small firms they serve.
Steering the right course is also important for financial institutions. It is in their best interest
to have well-informed and prepared small business customers. This helps the customers
become sound borrowers with growth potential. Growing firms help create economic value
in their communities and additional profitable business relationships for their banks.
While providing advice and assistance to inexperienced small business customers and loan
applicants can be costly, many institutions do regularly provide such advice and assistance.
Financial institutions can help screen information resources and locate assistance. This can
be done through a mentoring relationship with a small business customer or supplier,
through the normal loan application process, or by the selection of a knowledgeable and
reliable third-part broker organization in the community to help prospective small business

For community bankers in small towns, such assistance may take the form of informal
advice to bank customers or occasional free seminars sponsored by the bank on such
subjects as business tax and estate planning or a business development plan. Community
bankers often take pride in knowing their customers, their particular needs and capacity, and
the way to tailor financial technical assistance to meet those needs.
Many larger institutions, several of which you will hear from at this conference today, have
invested considerable resources in operations designed to provide hands-on consultation and
assistance to large numbers of small firms. As a business development strategy, the up-front
costs of these activities are defrayed by business relationships with growing firms that
become long-term customers of the bank.
Another common strategy is to help create or fund a specialized small business development
unit or subsidiary organization within the bank. Small firms in need of assistance are
referred by other units within the bank or by business development organizations within the
community. Such specialized bank units can usually provide a full range of financial
products and services, advice, and technical assistance to small businesses as they grow.
Finally, many institutions have chosen to support third-party organizations that provide
technical assistance to small firms, especially those just starting up. Usually these thirdparty groups are experienced nonprofit organizations selected and funded because of their
expertise and track record. Many are also multi-faceted financial intermediaries, such as
community development financial institutions, that can provide specialized gap financing.
Continuing Challenges
No matter how businesses and institutions develop, we face a number of common
challenges. First, there may be a need for significantly more research about how small
businesses and entrepreneurs obtain financial and business development information. To the
extent that research can help pinpoint the most cost-effective techniques for small business
growth, it can help stimulate greater interest in technical assistance for small businesses.
Second, the diversity and fragmentation of technical assistance resources and organizations
often makes it difficult to identify the most appropriate and effective help for particular
small businesses. Consequently, for most institutions that chose to use third-party broker
organizations, considerable time and effort is often needed to identify and assess the
particular expertise and capacity of each available alternative lender or technical assistance
intermediary. Further, each institution seeking to use third-party intermediaries may have to
conduct its own analysis of each. As in most economic relationships, lack of information
makes for an inefficient market. Consequently, a valuable local activity may be a
coordinated effort to organize technical-assistance providers and make available on a
centralized basis regularly updated information about their specialties, activities, and track
records. This makes sense both for entrepreneurs looking for assistance and for financial
institutions seeking partners for their small business development activities.
Third, most financial institutions are painfully aware of the need to remain on the forefront
of technologies that enhance their own business capacity and improve productivity. Use of
technology for most businesses, no matter how small, may be essential to their current and

future long-term success. To the extent that institutions mentor, assist, or broker assistance
for small firms, their small business assistance programs will need to consider how firms
can use new technologies effectively.
Finally, many financial institutions themselves need to learn more about the tools and
techniques available to help small businesses grow. The Federal Reserve, as well as the
other banking agencies co-sponsoring this conference, will continue to provide institutions
with appropriate information and resources about the tools and techniques available.
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