America's stimulus programs saved the big banks — and starved the small businesses. Kevin Klowden, economist at the Milken Institute, breaks down how decades of impatient capital created the lending deserts that still cut off small businesses today, and what it would actually take to fix it.
When the government pumped trillions into the financial system after the Great Recession, the money was supposed to flow downstream. It didn't. Kevin Klowden, Executive Director at the Milken Institute, watched the capital aggregate in the hands of large institutions while community banks collapsed and minority-owned lenders disappeared. The result: a generation of small businesses born into a capital desert.
Kevin and Everett trace the structural failures behind that gap — from Dodd-Frank regulations that disincentivized small-scale risk, to the destruction of the informal know-your-customer relationships that once made local lending work, to the stark absence of small business credit data that still plagues the system today. They also get specific about solutions: data portability frameworks, government loan guarantees that pay for themselves, and what the fintech lenders that actually survived learned from the ones that burned out.
Subscribe to Small Business Unscripted for conversations with the economists, founders, and operators who understand how capital actually moves — and what's in the way.
What You'll Learn:
Chapters:
[00:00] Quick Fix Bailouts
[00:36] Meet Kevin Clouden
[01:09] Quality of Life as an Economic Driver
[02:19] The Economics of Place
[03:58] Who's Actually Underserved?
[08:06] What Economic Mobility Really Means
[09:30] Fintech & Alternative Finance Options
[12:38] Know Your Customer in Lending
[16:54] Speed vs. Better Terms: The Tradeoff
[17:16] Data Portability in Trade Finance
[20:37] The Gap Between Lenders and Borrowers
[24:09] Women, Childcare & Small Business
[28:27] How Guarantees Reduce Lending Risk
[31:56] Why Small Business Credit Still Lags
[36:00] Tariffs, Supply Chains & Pricing Pressure
[41:01] Final Advice for Small Business Owners
Kevin’s Highlights:
"The biggest problem with TARP, the biggest problem with quantitative easing, wasn't the idea behind it. It was the fact that everybody went with, 'Let's show that we're acting quickly, and let's get the money out the door.' There weren't incentives put in place to make sure the money got everywhere it needed to."
"Payday lenders exist because people are unbanked or underbanked. And that happens because there is that lack of trust — either the institution not trusting the individual, or the individual not trusting the institution."
"This isn't a zero-sum game. This country succeeds because lots of different businesses grow together. And as long as we remember that — that this is how people have economic mobility, because they can keep doing better — that's what we want to see."
Connect:
Connect with Everett: http://linkedin.com/in/everettksands
Connect with Kevin: http://linkedin.com/in/kevinklowden
Learn more about the Milken Institute: milkeninstitute.org
Continue the conversation: smallbusinessunscripted.com
Learn more about Lendistry: lendistry.com
[00:00:00] Kevin: The biggest problem with TARP, the biggest problem with quantitative easing, wasn't the idea behind it. It was the fact that everybody went with, let's show that we're acting quickly, and let's get the money out the door. This is not a zero-sum game. [Everett: Yeah.] This country succeeds because lots of different businesses grow together. [Everett: Yeah.] And lots of different people do it. The communities grow, and as long as we remember that, we recognize that this is how people have economic mobility [00:00:30] — is because they can keep doing better, and that's what we wanna do, and that's what we wanna see.
[00:00:36] Everett: That's Kevin Klowden, executive director of MI Finance at the Milken Institute. Kevin studies the big picture, but today he's breaking down what all of that actually means for your small business. From access to capital to understanding economic trends, he's making the macro personal. I'm Everett Sands, your host and the CEO of Lendistry. This is Small Business Unscripted. Let's get into it. [00:01:00]
Kevin, welcome to Small Business Unscripted. Great to have you here.
[00:01:08] Kevin: My pleasure.
[00:01:09] Everett: So I always start out with one question that I'd just like to kinda understand the mindset of the guests that come on the show. Could you put this in order for me? No bad answer.
[00:01:20] Kevin: All right.
[00:01:20] Everett: Today, how do you think about, just personally, career, compensation, and quality of life? Put those in order for me. Career, compensation, and quality of life.
[00:01:29] Kevin: Well, [00:01:30] quality of life comes first at this point. [Everett: Okay.] I think if you talk to everybody [Everett: Yeah.] right now — and this is particularly an issue when you talk to Gen Z and you talk to [Everett: Yeah.] the younger generation. I've got three kids [Everett: Okay.] — one's just starting college, one's just finishing, and one's out of college. And for all three of them, if you ask, they all care very much about what they do for a living. They wanna be passionate about it, they wanna love it, so obviously career fits in. But it's not about success as much as [00:02:00] it is about wanting to enjoy it and wanting to enjoy their life. And we're not talking about going and just goofing off. We're not talking [Everett: Yeah.] about just socializing. But for them, and for most people I'm talking to — even people who are in their 50s and 60s now — [Everett: Yeah.] quality of life really comes first.
Everett: You've got a Master's of Arts in Economic Geography.
Kevin: Yes.
Everett: What is that?
Kevin: So that's a fun one. What it came out of is, at the University of Chicago, [00:02:30] I had always had a passion for geography. [Everett: Okay.] This is something that I knew about when I was a little kid. I mean, when I was five, I had memorized all 50 states and their capitals. [Everett: Okay.] Now, that didn't have any positive value other than to say I could do it. [Everett: Okay.] When I was older, it drove me crazy because a kid went on Letterman showing off the fact that he could do it at six, and I was like, "I could do it younger than that."
[00:02:50] Everett: Yeah, yeah. Too bad Letterman didn't invite you.
[00:02:51] Kevin: But, yeah, exactly. No, but that's all right. What it came down to is that I had always been interested in the idea that place pulls [00:03:00] everything together. [Everett: Mm.] And what economic geography was is that the University of Chicago used to have a full geography department, and it had shrunk down to being a committee, which meant it was interdisciplinary. Which meant that I was taking and blending together economics courses and economic work, some sociology — we even did things in terms of public architecture and all that. [Everett: Yeah.] But the main focus of this: what are the economics of place? What's the economics of business? What's the economics that drives a city? [Everett: Mm.] And my focus was the State Street commercial district in [00:03:30] downtown Chicago, which had been this amazing, thriving business district — small businesses, large businesses, everything — and had been trashed, essentially; the city had mismanaged it. And right when I was doing this work, it was starting to turn around. It was starting to do better. [Everett: Yeah.] And actually, for about 20 years, it did really well. It's not doing as well again. [Everett: Yeah.] But I learned a great deal about how place and how people and resources all tied together to make something happen.
[00:03:58] Everett: As you know, here at Lendistry, we [00:04:00] focus on helping underserved businesses get access to capital as kind of the core business. That definition of underserved has grown, from my perspective, tremendously over the last 10 years. When you think about some of the research you've done, how do you think about underserved over the last 10 years? I mean, do you agree with me? Do you disagree? Do you think underserved has changed? And if so, again, based on your research and what you know, why?
[00:04:29] Kevin: We were [00:04:30] looking at it, and the thing that we found in our research is that the greatest loss — and there were a number of great losses, but one of the greatest losses for business and for people that came out of the Great Recession — was that you had so many community banks, so many minority-owned and oriented banks, that disappeared.
[00:04:54] Everett: Yeah.
[00:04:54] Kevin: And even when you had the larger banks that might have closed branches or [00:05:00] done anything, you had this loss of relationships. And it meant that a huge number of businesses, of people, particularly from what were already underserved backgrounds, became even more underserved. [Everett: Interesting.] And we saw this pattern grow. And the other thing that happened is that a huge amount of capital was injected into the system through quantitative easing.
[00:05:27] Everett: Mm-hmm.
[00:05:27] Kevin: But that capital, rather [00:05:30] than going in and rescuing these smaller banks, basically became aggregated in much larger institutions. [Everett: Mm.] And it became — whether it was in real estate, whether it was in larger banks, whether it was in private equity, [Everett: Yeah.] whether it was anywhere else. And everything that went on the regulatory side — especially if you look at Dodd-Frank, if you look at some of these other regulations that were put in—
[00:05:52] Everett: Yeah.
[00:05:53] Kevin: —basically disincentivized risk at the lower level [Everett: Yeah.] and incentivized risk [00:06:00] only when you scale up. [Everett: Exactly.] And so that made it a lot harder if you're a small business operator and you want expansion capital; if you were looking to buy a home and suddenly your down payment increased dramatically; and by the time that you hit the pandemic, you're suddenly competing against investment funds and others. And that means that the capital that really needs to be there has only generally been there if [00:06:30] the sector is viewed as growing rapidly and attractive. It's hard to get the attention and get that money you need—
[00:06:38] Everett: Yeah.
[00:06:39] Kevin: —to grow.
[00:06:40] Everett: Yeah.
[00:06:41] Kevin: We operated on the idea of too big to fail—
[00:06:43] Everett: Yeah.
[00:06:44] Kevin: —but we didn't ever look at too small to fail, or the local needs, or anything else. There was not a structure and incentive set in for that. And when we wound up in a similar situation in the pandemic, when you were looking at the various rescue [00:07:00] programs and the money that was sent out, everything was set around get it out quickly. [Everett: Mm.] Let's show how quickly the money is going out. And by the way, this isn't just a government problem. This can be a problem at institutions, [Everett: Mm-hmm.] including meeting CRA requirements — or otherwise this can be [Everett: Yeah.] a problem anywhere that's basically trying to meet their quarterly statements [Everett: Yeah.] or all that. And we've lost the idea that it takes a while to build something worthwhile, and that [00:07:30] for most institutions it can take a while longer. It's not a matter of a quarterly return or a year. It could be five years, 10 years. And the other thing that we lost track of, and that we've been struggling with — and we're still, by the way, better in the US for this [Everett: Yeah.] than most of the rest of the world [Everett: Yeah.] — is the fact that the main mechanism for job creation, the main mechanism for economic advancement, is a [00:08:00] small business growing into a medium-sized business. [Everett: Yes.] This does more than almost anything else.
[00:08:06] Everett: So you did some work on economic mobility.
[00:08:10] Kevin: Mm-hmm.
[00:08:11] Everett: And I'm bringing this up because, first of all, your last comment is so insightful. But you and I are gonna have to do a little bit of translating. So let's first talk about the banks leaving the area, 'cause I think that's connected to economic mobility. So first of all, what is economic [00:08:30] mobility, for our audience? Let's start there.
[00:08:32] Kevin: So economic mobility at its core is something that's tied to what we would've described as the American dream—
[00:08:39] Everett: Mm.
[00:08:39] Kevin: —you'd say. This idea — when people originally came to the US willingly, [Everett: Yep.] the idea was ultimately, it was and is, economic mobility: that you're not stuck in the economic circumstances in which you were born. [Everett: Yeah.] You have the ability to be more [00:09:00] prosperous than the generation before you. And so that means that people come here because they want that chance and that opportunity. And if you look at it, where else is there in the world [Everett: Yeah.] that's better for that? Even with all the things that have restricted capital access [Everett: Yeah.] here in the US since 2008, the fact remains that around the world, people still look at the US as where the capital should be, where the risk is possible, where that opportunity is [00:09:30] there.
[00:09:30] Everett: And so when you think about that access to capital, what economic trends do you see that are important today, either for the lender or for the small business, in relation to the economy?
[00:09:43] Kevin: One of the big things to look at that's really important is the idea of what we essentially call alternative finance, and then it ties into what's called fintech, or financial technology. And the idea is that in a modern [00:10:00] digital world, where you're not just stuck with physical locations, you're not just stuck with physical access, then you have an opportunity to go out and get financing through virtual banking. One of the real issues that happened for a number of early fintech lenders was the ones that were impatient — and you'd see ones that would basically grow quickly and then sputter out [Everett: Yeah.] — is that they couldn't price their risk effectively, and they couldn't [00:10:30] price their capital effectively, so they would burn through their capital too quickly, or they would wind up in a situation where they get lending initially because of the fact that everybody was really impressed with their idea.
[00:10:44] Everett: Yeah.
[00:10:44] Kevin: But people would get burned, or they'd reassess the numbers, and they'd look at it, and they couldn't get the next round, or they'd wind up with that. I mean, interestingly enough, the first group to show sort of what not to do were actually the [00:11:00] online mortgage brokers, [Everett: Mm.] because the online mortgage brokers were essentially trying to facilitate lending. And I want to draw a distinction, because most of them really were just passthroughs. But what they showed was that issue of separating in terms of the know your customer and the lack of data collection, and also, bluntly, engaging in practices to trap people into loans that they couldn't actually pay back [Everett: Right.] — because their metric for [00:11:30] success was not the success of their clients, but the amount of passthrough that they generated. [Everett: Interesting.] And if you're looking at a successful lender now — a successful fintech, I mean, and not just in the US; if you're looking at some of the fintechs I've dealt with and talked to who are lending in Africa, lending in Southeast Asia, and so on — it's really about: how great is that market? How can you grow it sustainably? How can you [00:12:00] maintain and grow your capital, [Everett: Yeah.] let alone your repayment rates and everything else? [Everett: Yeah.] And so it's a different set of equations. [Everett: Interesting.] And it's looking at that data and recognizing that. And I think the one good thing, in particular with the mortgage brokers and the way they imploded, [Everett: Mm.] is that it's meant everybody who's come since then has actually had to be invested in and look at things [Everett: Yeah.] and think through, "What's my strategy? 'Cause I'm not just trying to disburse capital. I'm [00:12:30] actually trying to get it back." [Everett: Yeah.] "I'm trying to be in a position where I thrive because my clients thrive." And that's really important.
[00:12:38] Everett: You've brought up an amazing point. One is that looking at data, and maybe looking at it a little bit more fulsome, leads to a better understanding of who you're lending to. And if you have that better understanding of who you're lending to, then you could also have a better, I guess, prediction of the outcome. Would you agree?
[00:12:58] Kevin: Absolutely.
[00:12:59] Everett: 'Cause a lot of [00:13:00] predatory lenders sit there and just say, "I'm gonna just keep increasing rates, and I'm gonna outrun my lack of sophistication" — call it data gathering. "I'm gonna outrun how good or bad my algorithm is, and I'm just gonna keep throwing that towards the customer." So maybe rates start at 25%, and then they go to 30% and 40% and 50%, which to me is crazy, 'cause I don't know how the business could have that margin, right? But it does seem like that, unfortunately, is the [00:13:30] trend.
[00:13:31] Kevin: Well, and the thing is — and this is something that we saw with a certain number of the early companies that went into [Everett: Yeah.] essentially packaging themselves as fintechs and being [Everett: Yeah.] online lenders — is they weren't investing in know your customer. So they're engaging in this. All of this, again — it's not just about profits, it's about pricing the risk, and then how [Everett: Yeah.] do they price that so that they can attract the capital?
[00:13:58] Everett: Yeah.
[00:13:58] Kevin: And if [00:14:00] they don't invest in [Everett: Yeah.] knowing who they're lending to, if they don't look at their profiles, if they don't look at anything, then they're operating in this space where they need to recognize that as a lender of last resort — because that's essentially [Everett: Yeah.] what they are — that if they produce too many defaults, if their reputation goes sideways—
[00:14:23] Everett: Yeah.
[00:14:23] Kevin: —then they're stuck holding the bag. In some cases, maybe you're looking for that short-term [00:14:30] surge, and then there isn't a long plan. But the fact is that if you're a company that's trying to actually grow your customer base, [Everett: Yeah.] maybe you have a relationship with — you find somebody who's, I don't want to call predatory, but [Everett: Yeah.] a higher-risk lender. You basically do this. And one of the things that I was aware of — I had this conversation a number of years ago — is that the British government actually tried this referral system that didn't really work as well, [00:15:00] because they didn't have enough institutions, and the way it was executed didn't really work as well. But the idea was that they would offer somebody who was rejected at a conventional bank, a traditional bank, a connection to a fintech and said, [Everett: Yeah.] try this.
[00:15:16] Everett: Yeah.
[00:15:17] Kevin: But the problem was, the fintechs got mad because the only clients they were getting were pretty [Everett: Yeah.] not great.
[00:15:24] Everett: Yeah.
[00:15:25] Kevin: And the businesses got mad because they felt like, [00:15:30] well, the pricing we're getting and the way we're getting treated isn't really good. [Everett: Yeah.] This isn't a great solution. And ultimately, the government was like, "Ugh, no, this isn't really doing what we want to." [Everett: Yeah.] Because instead, if they had gone and said, "Hey, we're the government," or, "We're HM Treasury," or even an institution like the British Business Bank or anybody else — if they go and they say, "Here's the data, here's your options, here's who fits the kind of loans you're looking [00:16:00] for."
[00:16:00] Everett: Yeah.
[00:16:00] Kevin: And if you look and say, "If there is an online lender who does this, we can make this work." Right now in Britain, there are fintechs who exist — who literally exist just in the small to mid-size business space. [Everett: Yeah.] That is their entire clientele. [Everett: Yeah.] They market themselves. They seldom say, "We know who our customer is." [Everett: Yeah.] "We price accordingly. We do this." And if somebody wants personal loans, there's a whole slew of those companies that do that, and they know that they are competing against the [00:16:30] traditional lenders.
[00:16:31] Everett: Yeah. It's interesting, because I feel like the US is moving that way. Your analysis of know your customer is interesting. I tend to think from a banking perspective, where know your customer is all about fraud and different things like that, but you're taking it deeper and saying, "Look, know your customer is also about how to build the proper algorithms and decisioning tools to get the predictable outcome of losses or results." So let's take the other side of that. What do you say to the customer that says, "I want this transaction to happen really, [00:17:00] really fast"? But on the flip side, especially in a small business world where we don't have all the tools that the personal side has, getting more information could actually lead to better terms.
[00:17:12] Kevin: Absolutely. It's not exactly related, but one thing that I was very involved in, and that ties in a bit in terms of small business lending, is I spent a number of years chairing something called the Trade Finance Advisory Council for the US Department of Commerce.
[00:17:28] Everett: Okay.
[00:17:28] Kevin: And the whole point of that was [00:17:30] to focus on business lending for the sake of exports—
[00:17:34] Everett: Mm.
[00:17:34] Kevin: —and growing businesses by exporting.
[00:17:37] Everett: Okay.
[00:17:37] Kevin: The mandate was essentially that, recognizing the US's massive trade deficit, if the US is gonna actually export and export aggressively — and knowing that at the time that I was doing this, the Ex-Im Bank kept on being in political trouble. [Everett: Yeah.] And the joke was always that it was called the Boeing Bank, because it was doing that same thing. It was just [00:18:00] focusing on the big-ticket businesses, the safe ones that they already knew, [Everett: Yeah.] rather than growing their small business portfolio — and they've been doing a lot more of that since then, but at the time it was an issue. But one of the big things we got into was this issue of data portability. [Everett: Yeah.] This idea: could you set up a profile, and have data sharing between the US Small Business Administration, between the Export-Import Bank, between the various lenders or any groups they're in — so [00:18:30] in the private sector, especially the private sector — so that you could take that data and make it so you reduce the risk in advance? So that if a business comes and says, "Hey, I want to get a new line of credit because I wanna sell my new GPS device," or, "I want to sell my potato peeler," or, "I want to sell my haircare product," or whatever it is, they come in where a lender is looking at it and saying, "I got your [00:19:00] profile. We can expedite this. We recognize you have a limited window to get into this market, [Everett: Yeah.] and let's make this happen and get you that capital." But if you don't have that set up in advance, the only way — and you can correct me on this — but the only way you could expedite something like that is that you have to reprice the risk, because [Everett: Yes.] you're flushing all of that process out. You're pushing it to the side.
[00:19:23] Everett: Yeah.
[00:19:24] Kevin: And it could double the interest rate or triple it, depending on the circumstances.
[00:19:28] Everett: Yeah. Hold that [00:19:30] thought, Kevin. Now we're gonna take a break. We're gonna hear from our boss — Lendistry's customer.
[00:19:39] Simon: My name is Simon. I'm the CEO of Miss Cheese Tea Cafe, and I'm from Hong Kong. We were opening our new location. Even though it was a second-generation restaurant, we still need to add some equipments. So we found Lendistry, and they helped me to get a loan so we can [00:20:00] pay our contractor immediately so they can start as soon as possible. We were able to pay the bills on time, and we were able to start working on the improvement and to get the equipments on time before, I mean, the landlord has to start charging our rent. Didn't have to skip my payroll and everythings. I would recommend other business [00:20:30] to get a loan with Lendistry.
[00:20:37] Everett: Welcome back. We're talking to Kevin. The last thing we talked about, Kevin, was just how the lender might have to reprice risk because maybe they're not getting the adequate information they need from the borrower. The borrower wants to have the simplest process and the most streamlined process, but they need to know they're potentially at risk of not giving the lender enough [00:21:00] information. So do we have a lender problem, or do we have a borrower problem? What do you think?
[00:21:05] Kevin: We have both. The lender problem is something we've alluded to already, which is that we had a loss of a number of the institutions over the years who were locally invested, who were built and who had relationships, who could utilize and leverage them. They could do informal know your customer.
[00:21:23] Everett: Yeah.
[00:21:23] Kevin: If you go in and — not necessarily this business, but you know the businesses they [00:21:30] do work with. [Everett: Mm.] You can go ask around and say, "Will they repay? Are they good for this? What's their business plan? What's going on?" [Everett: Mm.] You have this sense of this. In a situation now, you've got to do that virtually. [Everett: Yeah.] You've got to do that through other means. And you need to build that. And over and over again, you run into that issue that if you're the borrower, the system has been very heavily set up to try and block the [00:22:00] last mistake, even if the last mistake doesn't really apply to your circumstances. [Everett: Yeah. Yeah.] And so you wind up where the cost of doing due diligence and compliance has gone up dramatically for a lot of institutions. [Everett: For sure.] And from a customer standpoint, the problem is that no one has really gone in, in numerous cases, and explained to businesses, "Hey, these are the steps you need to do. Let's do this in advance." Though I spent a [00:22:30] lot of time working with the US Small Business Administration [Everett: Yeah.] on ways that they could do that. I was doing this when I was dealing with trade finance, working with US export assistance centers, and constantly talking to them and saying, "Look, if you just take these steps in terms of information, you don't even have to do it yourself."
[00:22:49] Everett: Yeah.
[00:22:49] Kevin: Whether it's already recorded, whether it's virtually online, or it's written out, or it's anything — if you just take these steps, if you start out with this and explain, [00:23:00] "Hey, you do this," you reduce the chances of getting rejected for funding—
[00:23:05] Everett: Yeah.
[00:23:05] Kevin: —dramatically. If people know that they go in and they follow these steps, if they know that they're ready—
[00:23:10] Everett: Yeah.
[00:23:11] Kevin: —it saves time, it saves energy, all of this. And the problem that I often run into when I would talk with small businesses — and not just about these basic steps — but there are all of these different mentorship programs. You look at what Goldman was doing with 10,000 Small Businesses. [Everett: Yeah.] And the issue you [00:23:30] ran into is that if you're a small business owner and you don't feel like you have enough trusted subordinates, you can't take the time to go [Everett: Yeah.] through all these processes. Until they've earned it, you can't do that. And so you need to know, if I'm committing time — because time is money, [Everett: Yes.] much more so for a small business owner than anybody else, really — you need to know it's worth it, because you don't wanna take the chance that your business implodes while you're off doing this, trying to grow it.
[00:23:58] Everett: Yeah.
[00:23:59] Kevin: And [00:24:00] anything we can do to shorten sort of the process in advance, it helps the lender and it helps the borrower.
[00:24:09] Everett: It's like a Catch-22, 'cause I think about it. I think about, let's just take the woman running her business — and this is not unique to women — but she's running her business from 9:00 to 5:00, running a household, maybe checking the kids' homework, cooking, eating 'cause she didn't eat during the day, from 5:00 to 9:00, and then when does she have the time to even apply for financing? [00:24:30] Insert 10:00 PM, right? [Kevin: Mm-hmm.] 11:00 PM. Then the other side of that is, she could apply for a credit card and probably get done in five minutes. She could apply for a personal loan, probably get done in five minutes. Maybe a mortgage loan takes her a little bit longer — 30 minutes. And then insert the small business process, which is a lot longer, right? And I feel like sometimes, at least when I'm communicating to our team, is we gotta meet that customer where they're at. However, you also bring up another point, which is there's still [00:25:00] the execution of the business — which even if we figured it out perfectly, somebody still gotta guide her through capital raising—
[00:25:09] Kevin: Mm-hmm.
[00:25:09] Everett: —supply and distribution, ordering products, and all those things. And all that has to be somewhat in a YouTube-university-like concept, because none of that changes the time she's available. She's still only available at 9:00 PM or 10:00 PM, right?
[00:25:24] Kevin: And you raise something that's also really important, which is the number of women who [00:25:30] come in who are skilled — [Everett: Mm.] they're educated, they're experienced — but they stop and they have kids. [Everett: Mm-hmm.] And that derails their career progress; it derails their career path. The number of women who become small business owners as a second career is incredibly high.
[00:25:46] Everett: It is amazingly high.
[00:25:46] Kevin: Yeah.
[00:25:47] Everett: Especially the last three or four years.
[00:25:49] Kevin: Yeah. And the fact is that what we saw — and something you're raising — is that there is [00:26:00] a massive, massive breakdown in childcare.
[00:26:04] Everett: Mm.
[00:26:04] Kevin: And it's not unique to the US. I've seen this in all sorts of different places. But what's happened is that as childcare has been more expensive, as it's not subsidized by the government, as you're a small business owner — if there's no aggregation, if there's no, say, small business community that does subsidized childcare, there's no economy of scale in it — then what happens is that a huge number of women [00:26:30] left the traditional workforce. And if they were able to do it virtually, [Everett: Mm-hmm.] they'd do it. But if they couldn't do virtual or hybrid... And the issue is, again, it's childcare. [Everett: Yeah.] And the fact is that even if we know there's a fundamental demand, you can't ultimately price childcare at a level that is commensurate with the amount of work that predominantly falls on women — [Everett: Yes.] but with many men as well. And that's an issue. [00:27:00] And so being able to adapt and do this — how do you streamline and effectively aid this process? How do you provide that capital that is needed? Because one of the categories that I actually dealt with over the last couple of years is military spouses. [Everett: Mm-hmm.] And you're dealing with very educated, very motivated individuals, a disproportionate number of whom — the problem wasn't they couldn't get a job; it's that they couldn't do it and manage their childcare and relocations and everything else. [Everett: Right.] And so [00:27:30] it's: how do you set up online businesses? How do you structure? Do you get them the capital? [Everett: Yeah.] How do you give them the opportunity? And it's a real issue. And the fact is that if you have lenders who understand that, who are built in and can deal with that, then they can price around it and they can do it. But whether it's military spouses, whether it's women-owned businesses, [Everett: Right.] whether it's businesses in certain geographies with certain ethnicities — you look at this, and if [00:28:00] somebody's willing to specialize, if somebody's willing to say, "Hey, [Everett: Yeah.] if we can apply this enough, we reduce our risk. We recognize the fact that our rate of return is actually higher, that we are actually able to get more growth." [Everett: Yeah.] But it's getting through that initial phase of pricing that risk, and accepting it, and putting the work in to start off with, [Everett: Mm-hmm.] and then realizing that the rate of return and the opportunity is so much greater.
[00:28:26] Everett: Yeah. You said this before, but [00:28:30] repricing risk, right? How do you think about the different ways we could solve that? I mean, I realize the borrower could pay — probably causes other problems; we already mentioned that. But what are ways that you think about solving for repricing the risk?
[00:28:45] Kevin: Well, there are a few. The first is what I alluded to, which is the data portability issue, the profile — it's recognizing, with other lenders, that creating a standard... It can be anonymized, it can be whatever else, but [00:29:00] creating certain standards to share those profiles actually benefits everybody.
[00:29:04] Everett: Mm.
[00:29:04] Kevin: You're not giving up your clients, you're not doing anything else. What you're literally saying is, "Hey, if this profile is there" — in the same way that you can ask for medical records, the same way that you can with personal credit reports. [Everett: Yeah.] But even though we're in this very digital world, everybody's resistant for different reasons. [Everett: Yeah.] Nobody wants to be the one to pay for it initially, nobody wants to start it, but it's really significant. Another is, obviously, to go down the path [00:29:30] that larger government agencies like the SBA does. The SBA used to be a primary lender. That was what they did. [Everett: Yeah.] And they went and they did the math and said, "We could have a much, much bigger impact if instead of being the lender, we do loan guarantees."
[00:29:45] Everett: Mm-hmm.
[00:29:45] Kevin: And the SBA, when it established guidelines and it did this, it's been operating at, like, a 1 to 2% default rate, [Everett: Yeah.] which is ridiculously good. The SBA pays for itself. It doesn't lose [00:30:00] money. It actually — [Everett: Yeah.] if you go through it—
[00:30:02] Everett: SBA loan guarantees are about 3% these days.
[00:30:04] Kevin: Yeah. And so if it's 3%, that's ridiculously good for anybody. And if you're looking at this in terms of how it affects capital, anything else — you can do this at a state level, you can do it with state institutions. And this is where some of the money from the state of California is going: instead of doing lending again, it's guarantees. [Everett: Yeah.] It's setting up — do you do loan guarantees? Do you do structures to [00:30:30] reduce their risk profile? [Everett: Yeah.] And if you do it right—
[00:30:33] Everett: Yeah.
[00:30:33] Kevin: —then the programs pay for themselves. They're not trying to make money; they're just simply trying — or maybe a small amount of money.
[00:30:39] Everett: Yeah.
[00:30:40] Kevin: This is a pattern you see: governments have trouble committing that capital in the first place. They keep thinking about it as coming out of the state budget—
[00:30:51] Everett: Yeah.
[00:30:51] Kevin: —and they don't recognize that it goes out a certain amount once, and it doesn't keep going out. They don't have to do anything. [Everett: Short-term thinking.] In fact, it's all short-term thinking — [00:31:00] and then the money comes back in. So it's figuring out: if, say, the federal government doesn't want to play that, [Everett: Yeah.] they don't want to expand the SBA's operations, there are issues with Ex-Im and what they do in loan guarantees or otherwise — does it come at the state level? Does it come at the local level? Does it come from the state or others, or even sometimes even foundations [Everett: Yeah.] who's providing those backstops? [Everett: That's interesting.] And saying, "We're not giving our money away. [Everett: Yeah.] This isn't a [00:31:30] giveaway. This money is gonna come back in." [Everett: Yeah.] In the same way as, sort of, the community microlending model, where you bring money in from all the local community, and then the money goes out, and then it gets repaid. [Everett: Yeah.] You don't have to keep on doing that, and you get the opportunity to pull your money back out of it at some point if you need to, because it will grow enough. There'll be enough other sources of capital that you're not putting the state, the local government, the foundation—
[00:31:56] Everett: That's kind of a nut. Let's do a little bit of translation. So what you [00:32:00] said is so simple, yet so complex that it hasn't been done. Now, we are trying to do this at Lendistry — we had talked more about that offline — but I think you're exactly right, and interesting that it circles back to the first comment you made, which is the lack of patience. Because I think people don't understand how much data there is in personal credit, and how long it's actually been around, versus small business credit. I mean, we're talking decades [00:32:30] difference in terms of timing. Yeah, please.
[00:32:34] Kevin: And the irony is that small business credit, in part, doesn't exist — that data doesn't exist — because for a very long time, people didn't think it needed to.
[00:32:45] Everett: Yeah. Interesting.
[00:32:46] Kevin: When you had a system, particularly coming out of the Great Depression, when you had the FDIC and the FSLIC — the savings and loan one, [Everett: Yeah.] doesn't exist anymore — that were set up [00:33:00] to essentially act as a government guarantee to encourage deposits and lending and this activity, and there's a slew of all these institutions that came in. But slowly but surely, we took away the incentives for these local institutions to exist. Some of it was that the people who ran the institutions got impatient and were like, "Well, you know what, we wanna be able to get more profits. We wanna grow more." And so [00:33:30] the savings and loans collapsed in part because they were investing in areas, and putting their capital in areas, they didn't understand at all.
[00:33:39] Everett: Yeah.
[00:33:39] Kevin: It's that thing of, in the search of growth or risk, but not doing their primary job. We had the second wave that happened coming out, as we talked about, of the Great Recession, and that was on top of the fact that we'd removed the Interstate Banking Act, we'd removed a bunch of [00:34:00] these things that created incentives to aggregate for bigger. [Everett: Yeah, that's true.] But that meant — small businesses didn't really feel like they needed it, because the data was local. Everything was local.
[00:34:14] Everett: Yeah.
[00:34:15] Kevin: Personal credit exists because of credit cards. [Everett: Mm-hmm.] It exists because of the fact that there were institutions in this country that were issuing credit at a national level.
[00:34:28] Everett: Yeah.
[00:34:28] Kevin: They were doing [00:34:30] it in a variety of different ways, as we added to things like, say, student loans [Everett: Mm-hmm.] and various other things — and obviously mortgages and other areas. But as we added to things like this, as we created those circumstances, what happened is that we put ourselves in a circumstance — we created a circumstance — where there was a driving need for this. And I have personal issues with the way [00:35:00] that the credit scores are done [Everett: Sure.] and all that, but the fact remains that it exists because somebody essentially was given incentive to create it, to invest in it, [Everett: Yeah.] and do that. The problem has consistently been, in terms of small business lending, is even though that need is there, nobody has sort of pushed for that aggregate for it. And that recognition that [00:35:30] ultimately — it's not even that you need a credit agency, it's not even that you need a rating agency, it's not even that you need somebody, some standard in terms of this data portability, whether it's industry-based, whether it is government-based, however it is — this recognition that investing in this infrastructure, 'cause that's what it is, [Everett: Yeah.] is going to pay massive, massive dividends for everybody.
[00:35:57] Everett: I totally, totally see it. [00:36:00] So going back to kind of macro factors — and we're shifting topics now — what do you think small business should pay attention to in today's economy? I mean, there's a lot of things going on. Tariffs probably get said, but I bet small businesses didn't even know what tariffs were for the most part, or maybe they didn't focus as much on them as big businesses did. But what are the things that, if you were a business owner today — a small business owner — you'd be focusing on or [00:36:30] thinking about?
[00:36:30] Kevin: Well, you're right. I mean, when you look at tariffs — and I think, though, that it's not just tariffs, it's the thing that tariffs lend themselves into that was already a problem coming out of the pandemic, which is your supply chains. It's what's your material cost? What's your sourcing cost? On all of that. And that's been under disruption for a while, from different ways and issues. But one of [00:37:00] the things that is really rough for everybody is that larger businesses have access to more data. They have access to more options and all that, but they stop, and they have the ability to price it in on scale. If you're a small business and you want to compete, and you're basically told, "Well, the only way you can compete is to source this material or this component from China."
[00:37:26] Everett: Yes.
[00:37:26] Kevin: It's the only way [00:37:30] you can compete on price, the only way you can do this. And then suddenly China is now too expensive. And you look and you're saying, "Well, I'll go to India," and then suddenly India is too expensive. And then you're looking for it and saying, "Well, maybe I can do it through Mexico." And then you discover that your Mexican source is actually facing rules-of-origin issues, because their source is really China. And so what do you do with that? And that's just one part of this. And another part of this is that you [00:38:00] also, at the same time as you're looking at your pricing, you also have to look at: well, how much can my customers absorb? [Everett: Mm-hmm.] How much can my distributors absorb? How much can any of this? Because you run into that. And the place that people live and experience it the most is food. [Everett: Mm-hmm.] You look at the prices at restaurants — look at just how much they've gone up. [Everett: Mm-hmm.] 'Cause they're businesses that have to source. But ultimately, what happens is, [00:38:30] if you do enough of that, your pricing stops getting trusted. You aren't trusted. [Everett: Yeah.] And so you have to be careful about this. And it's also rough because we saw this when Amazon was trying to actually put their tariffs in and say, "This is how much of it is tariffs," and got a massive blowback from the government. For your average small business — and tons of [00:39:00] them basically do work through Amazon; the Amazon Marketplace is this massive, massive operation — having that and being transparent about that is really hard. So you have to look at your origin pricing, you have to look at the middlemen pricing, you look at how much your customers can absorb, [Everett: Yeah.] and you have to keep mindful of all of that. And in the midst of all of that, you still have to look at your credit. [Everett: Yeah.] And you have to look and say, "What's my cost of capital? What's my cost of doing business?" And some institutions have very [00:39:30] much scaled back. They've figured it out — and if they do it early enough, they do well. The companies that don't — they're addicted to this growth model, and they don't catch or understand when their model has changed — [Everett: Yeah.] it can be devastating. And then not just to them, but if you're a company who essentially becomes a dominant supplier and you collapse... I mean, you look at First Brands, for [00:40:00] example, right now, [Everett: Yes.] and just the outcome of that.
[00:40:02] Everett: Hmm.
[00:40:02] Kevin: Yeah. And one of the ones I've been doing some work and focusing on is JOANN Fabrics, because JOANN literally bought up all of their competitors and spent all this capital growing, growing, growing, and not actually focusing on the dynamics of their own market. And their model was already failing, and they got a brief surge coming out of the pandemic. They thought, "Oh, we're doing really well." Well, they weren't. [00:40:30] They hadn't ever reassessed their model or looked at who their actual customers were. [Everett: Right.] And so they collapsed — not because there isn't a demand. There's a huge demand. For First Brands, there's a huge demand. But it doesn't matter if you don't keep track of what your market can absorb, what your market can do. And JOANN and First Brands both had issues where their supply chains started collapsing, because they weren't actually keeping up with their payments to their suppliers. [Everett: Yeah.]
[00:41:00] Everett: Yeah, totally agree. So what advice — and this will be our final question — what advice do you have to small business owners?
[00:41:07] Kevin: The hardest thing in all of this is to figure out what's worth it. [Everett: Mm-hmm.] If you're a small business owner, you're doing it because you believe in what your business is. Maybe you inherited it, maybe you did it because you're passionate about it. Maybe you did it because you're selling a product you really care about. Maybe you saw a need. Maybe you care about your community and [00:41:30] saw that there is just a void there. Any of it — that's great. But ultimately, you need to look at and say, "What do I spend my time on?" in terms of growing that business. Because this isn't a circumstance where you just say, okay, you grow or you die. And we're not talking about insane growth models. We're not talking about any of it. We're just talking about: how do you make sure that your business is positioned to last [00:42:00] not just five years, but 10 or 20? [Everett: Yeah.] And that means you look at your lenders and say, who can give me a reasonable price? Can I go through the time to get a loan at a 6% rate or a 12% rate, if that's what you need, as opposed to going to the credit cards and [Everett: Yeah.] paying 30, or predatory lenders, or anything like that? [Everett: Yeah.] And saying what opportunity is worth it, and what is worth it in terms of how you spend your time, and in knowing your [00:42:30] market and everything like that. And there are an incredible number of small businesses that know their immediate customers, they know their products — but then how do they convey that information to a lender, to anybody else, and say, "I'm ready"? And how does a lender basically go to them and say, "Okay, here's what you need to do to show it. Here's how you make this process faster. This is how you get success." We have whole huge numbers [00:43:00] of businesses that are out there that tell somebody how to get to college.
[00:43:04] Everett: Yeah.
[00:43:05] Kevin: Or get to grad school, or get to anything else. There are books, there are systems, everything like that.
[00:43:12] Kevin: Now, no two businesses are the same, but there are certain basic profile things that, if they understand — not just in terms of having a business plan, but in terms of this understanding in how you translate that. And if there's a way to basically cut [00:43:30] the time, to expedite that, to cut that exposure cost, any of that — that basically makes it possible to get the loans they need, to get to the market they need, to position themselves to be able to do this — that's a huge, huge deal. And anything that can be done to also make them aware of risk well in advance, whatever it is, and say, "Hey, this is how you cut your exposure and keep yourself going. This is how you keep your shelves stocked," or, "This is how you keep your product flowing," [00:44:00] or any of that — that helps too. And a lot of it just is simply about: what's the information, what's the time that's worth it, and making sure that not only they have it, but whoever their lender is, whoever their client is, all of that — that this keeps going. Because if you can do that, then your odds of success for everybody involved jump dramatically, and that's what we want, because we want everybody to succeed. This isn't — [Everett: Absolutely.] this is not a [00:44:30] zero-sum game.
[00:44:30] Everett: Yeah.
[00:44:30] Kevin: This country succeeds because lots of different businesses grow together. [Everett: Yeah.] And lots of different people do it. The communities grow. And as long as we remember that, and we recognize that this is how people have economic mobility — because they can keep doing better, and their communities and their families and their clients and everybody else do better — that's what we wanna do, and that's what we wanna see.
[00:44:57] Everett: Makes sense. Well, thank you, Kevin. I really appreciate your insights, the conversation we had, and [00:45:00] looking forward to future conversations.
Kevin: So am I. Thank you.
Everett: Thanks for hanging out with us on Small Business Unscripted. Want more? Head to smallbusinessunscripted.com for additional episodes, resources, and to keep the conversation going. Thanks for tuning in. See you next time.