Starting a business is never an easy undertaking. Competition can be fierce; big businesses will bully newcomers to the market; and finding enough customers to eventually become profitable is a feat in and of itself. But one of the toughest steps, especially for entrepreneurs from disadvantaged backgrounds, comes even before any of those challenges: securing a loan to get the whole enterprise off the ground.
That’s the problem that some legislators on Beacon Hill want to solve by creating a state-owned bank, which would provide more and cheaper financing than private lenders for businesses and municipalities. Though the idea has come up and failed in the Legislature in the past — in 2011, the Boston Fed concluded that the juice might not be worth the squeeze — lawmakers should give it a second look.
One of the most crucial needs that a public bank would help fill is the credit gap that private banks leave behind. According to a report last year by Boston Indicators, there is an unmet demand for loans from entrepreneurs of color in Massachusetts to the tune of $574 million. While about half of entrepreneurs have an unmet need for capital nationally, the report estimates that that number spikes up to 76 percent for entrepreneurs of color. Indeed, as the report notes, the persistent racial wealth gap allows white entrepreneurs to raise capital from family savings — like a solid majority of new business owners — while it pushes Black and brown entrepreneurs to turn to banks or venture capitalists for seed money. And those institutions are less willing to give loans to people of color than to white applicants, even when their creditworthiness is the same.
A public bank would alleviate some of those racial disparities by allowing the state to funnel money through the new banking institution to minority-owned businesses, giving them more access to the financial capital that they need.
While private banks often oppose the idea of a state-owned bank — a coalition of bankers has come out in opposition to the potential legislation on Beacon Hill because they say it would compete for clients — the reality is that the public bank would likely deal with customers that private lenders have shunned. And though it is true that certain borrowers might turn to the public bank instead of private institutions if the interest rates are more appealing, the role of the public bank would specifically be to target the more marginalized communities that have been left behind by private lenders.
Beyond being a good resource for minority-owned businesses, a state-owned bank could also help fund projects that private lenders may decline because they’re seen as riskier investments or ones with low returns. For example, a public bank could help finance affordable housing developments or create incentives to build more environmentally friendly infrastructure by giving certain municipalities across the state low-cost debt for much-needed development.
Finally, there’s one key market where a state-owned bank is crucial for Massachusetts: the legalized cannabis market. Because of the federal prohibition on marijuana, private banks are reluctant to finance weed businesses. But marijuana growers and even dispensaries are quite capital intensive. Without adequate financing available for startups, the growing marijuana sector will be dominated by a few large businesses, which is not good for the local economy and potentially dangerous and predatory to consumers — in the mold of Big Tobacco. Getting a state-owned bank to help establish these small businesses would provide long-term stability in the market, regardless of what Congress may or may not do regarding the federal prohibition on marijuana.
The current proposal — spearheaded by state Senator Jamie Eldridge and state Representatives Mike Connolly and Nika Elugardo — for the state bank calls for setting aside $50 million annually for four years to provide the seed money to establish it. (The state’s treasury would provide $1.4 billion in existing deposits.) It’s a modest cost for an ambitious project, but if it succeeds, it can continue to grow. And this wouldn’t be lost spending; to the contrary, it could potentially even bring in revenue for the state. The only state with a public bank, North Dakota, has seen positive results from its public financial institution, using the funds to provide student loans and capital for agricultural businesses. In 2020, for example, the bank reported a $141 million profit. And since 1997, the state bank has contributed over $350 million to North Dakota’s general fund.
The idea of a public bank has been gaining steam. New Jersey’s governor signed an executive order to create a public bank in his state a few years ago — though the state’s plans were set back by the pandemic, and the bank has yet to actually materialize. Massachusetts could be a pioneer in this experiment. Given the need for more financial capital and the potential revenue stream a public bank could bring, there’s no reason not to be. If anything, it’s wise public spending.
Editorials represent the views of the Boston Globe Editorial Board. Follow us on Twitter at @GlobeOpinion.