There’s been a discussion in comments of how small businesses are financed. As it turns out the Atlanta Fed has looked into this and here’s what they’ve found:
| Average Success of Firms Applying (1 = None, 2 = Some, 3 = Most, 4 = All) | Median Age of Firms Applying | Equity finance | Angel | 1.6 | 3 |
| Venture capital | 1.6 | 3 | |
| Friends/Family | 2.0 | 4.5 | |
| Other | 1.6 | 26.5 | |
| Vendor Trade Credit |
2.9 | 9 | |
| Credit Card | 2.1 | 4 | |
| Loan or Line of Credit | Large National Bank | 1.5 | 6.5 |
| Community Bank | 2.4 | 15 | |
| SBA | 1.0 | 6 |
Let me put this into words. Businesses that are just starting out from scratch typically finance themselves out of the pockets of their founders or from informal (or even formal) loans from family and friends. While it’s possible for a business to secure venture capital or an angel when it starts out, it’s unlikely. Watch Shark Tank for some suggestion of why this is the case.
Credit cards are an extremely common form of financing for new businesses.
More established small businesses can routinely secure trade credit from vendors, usually in the form of payment terms. Very established small businesses can usually secure loans from community banks. Small business frequently have difficulty in getting loans from large national banks. This falls under my rubric of “big businesses like doing business with big businesses”.
The SBA? Fuggedaboutit.
Link is not working for me. I assume this is where you intended it to go.
http://macroblog.typepad.com/macroblog/2012/06/young-versus-mature-small-firms-seeking-credit.html
I think the meat of the article also points out what I see as a problem in our area. Small banks are disappearing. They have always been the ones who have been easiest for us to work with. We bank with a smallish local bank. I am trying to keep it that way.
Steve
I certainly wouldn’t be able to verify statistics. That data is hard to come by. But with one caveat, to follow, this seems reasonably, at least directionally, correct.
The caveat is that many small businesses get asset based financing from community banks. That seems to be a hole in the analysis. But it’s not a game changing observation.
To steves point, the industry has become barbell shaped. Ginormous banks with perhaps specialized lending practices, like LBOs. And then the small community banks where “character loans” are still made.
I’m less pessimistic about the availability of financing than maybe Dave. You don’t need JP Morgan to finance your small business. As I’ve pointed out a bazillion times, I’m less concerned about bank financing than I am the willingness of entrepreneurs to do the credit cards, the passing of the hat with family or the personal guarantees when the current political environment is “it worked?” Pay us. “it didn’t?” tough shit.
In my experience, the SBA is worthless.
There’s probably a lot less of that financing currently than is typical thanks to the housing bust and debt levels.
More evidence for breaking up the big banks/financial institutions….of course since both Democrats and Republicans are whores for said businesses it will never happen.
Hope and change you can believe in!!!
Hope and change you can believe in!!!
Hope for change in your pocket, ’cause they’re interested in keeping all the rest of it for themselves.