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updated 3/17/2013 2:17:42 PM ET 2013-03-17T18:17:42

Small-business borrowing is down substantially since the start of the Great Recession. Between 2007 and 2012, the number of non-farm, non-residential loans of less than $1 million dropped 43 percent, Federal Deposit Insurance Corp. Call Report data  show. Adjusted for inflation, the value of those loans has declined 23 percent.

Those in Washington debate whether the problem lies in too little lending or too little borrowing. But it really doesn't matter.

Whether small businesses aren't borrowing because they are too pessimistic about economic conditions to invest and hire, or banks aren't lending in response to regulators' demands that they ratchet up lending standards and shore up balance sheets in the wake of the housing-market decline and financial crisis, policy makers are right to be concerned. Small business accounts for roughly half of private-sector economic output and employment. Without adequate credit, small businesses don't hire or invest, creating a drag on the economy.

While politicians on both sides of the aisle would like to boost small-business borrowing, doing so requires a better understanding of it. Unlike big companies which borrow themselves, much small business borrowing is really personal borrowing by business owners, who personally guarantee loans, pledge personal assets as collateral, or borrow as individuals and plow the money into their companies. Ensuring that small businesses have adequate credit means making sure consumers can borrow.

Related: Why Business Loans Are Up for Grabs

According to a survey  conducted by the Gallup Organization on behalf of the National Federation of Independent Business, 49 percent of small-business owners used a personal credit card for business purposes in 2011, the most recent year data are available.

Barlow Research, a research-and-consulting organization advising the banking industry, found that 21 percent of small-business owners used their homes as collateral for business loans and 18 percent borrowed against their homes personally and then used the money for business purposes in 2007. Taken together, Barlow Research's estimates show that one quarter of small-business owners use home equity to finance business operations.

For nearly three-quarters of all U.S. small businesses structured as sole proprietorships, the business structure itself makes the owners personally liable for the business's debts. But even the owners of corporations and limited-liability companies tend to guarantee their businesses' debts personally. Research  by Federal Reserve economist John Moon estimates that 41 percent of small-business loans and 56 percent of the value of those loans are personally guaranteed.

Small-business owners' reliance on small consumer financial products to finance business operations means that policy makers have to make sure that consumer borrowing isn't being unduly restricted if they want businesses to invest and hire. This is where the law of unintended consequences may be rearing its ugly head. Recent efforts to protect consumers may be hampering small-business access to credit.

Related: Online Platform Connects Entrepreneurs with Local Lenders 

Congress created the Consumer Financial Protection Bureau to bolster consumer financial protection in the wake of the financial crisis. While our elected officials tried to ensure that the new agency wouldn't adversely affect small business, the widespread use of consumer financial products for business purposes has made that difficult in practice. 

Consider, for example, CFPB's efforts to protect consumers against rising credit-card interest rates. While that consumer protection might be worthwhile, it has an adverse effect on small-business borrowers. Because credit-card lenders cannot raise interest rates if borrowers' credit profiles worsen, card issuers have cut back on offering credit to less-credit-worthy borrowers, including some small-business owners who now cannot access a form of credit on which they used to rely.

The law of unintended consequences leads to the following counter-intuitive observation: To boost small-business investment and hiring, Washington has to make sure that consumer credit is flowing freely.

Related: SBA Budget Whacked $92 Million By Sequestration

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