A few weeks ago, the Subcommittee on Oversight, Investigations, and Regulations on the House Committee on Small Businesses led a hearing titled “Navigating Regulations: Alternative Pathways to Investing in Small Businesses.” The hearing examined how preexisting and forthcoming government regulations affect small businesses’ access to capital. One of the witnesses at the hearing was Parag Shah, founder of ACT | The App Association member company Vēmos.
Behind the Testimony
In his testimony, Parag highlighted the relationship between regulation and access to funding and various key issues in the regulatory sphere that are affecting small businesses and their ability to grow. Shedding light on issues many smaller enterprises face, his testimony focused on how the threat of overregulation makes it harder for businesses to have a strategy for exiting the market, which in turn can make it harder to ensure that capital returns to the economy or is used to start another business. Parag emphasized that businesses are constantly having to deal with the unintended consequences of government regulations, which makes it harder for them to successfully meet their goals.
In sharing his own experiences in accessing capital, Parag also discussed the different loan options available to small businesses. He clarified that traditional bank loans, which usually require physical assets as collateral, are often an awkward fit for new software companies whose assets tend to be intellectual property. These options include crowdfunding, where equity is exchanged for cash, and donation-based funding, where donors generally receive non-monetary compensation for their donations. These alternative financing options are good for some small businesses as they allow them more time to build up their client base without having to worry about investing in physical inventory. Other options include “seed rounds” of fundraising, where a person or group raises initial capital for starting a business, and “angel investing,” where business owners look for a single wealthy person to invest their funds in a business.
During the hearing, a common question from Members of Congress was whether Parag had ever looked into Small Business Administration (SBA)-backed loans and how they can be used to help small businesses. Benefits of SBA-guaranteed loans include low-interest rates, which allow businesses to prioritize investing in their growth rather than worrying about repaying interest. However, Parag pointed out that SBA loans are essentially traditional bank loans subject to physical asset collateral requirements. This consideration highlighted for the Committee how important alternative financing options are for startup companies, as they are less able to rely on financing from bank loans, whether backed by SBA or not. Another reason to skip applying for SBA or bank loans and go directly to seed investing or angel investors is speed. Small businesses often do not have the time to figure out all the different requirements needed to get an SBA or bank loan. When asked what can be done so SBA loans can help to better support tech entrepreneurs, Parag said it was important to use private markets to understand collateral. One option he raised is that if a small business receives private equity, then the SBA could come in and match the capital.
In Conclusion
This hearing helped to bring to light current issues small business owners face when trying to finance their business ventures. Parag’s testimony allowed Members of Congress to understand the issues small tech businesses face and how government intervention affects their options and decision-making process as they seek to grow and succeed. App Association members continue to demonstrate the importance of the small business voice in Congress. If you want to see more of Parag’s testimony, check out the whole hearing here.