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Small Business in Focus: Finance

A Compendium of Research by the Small Business Administration's Office of Advocacy
July 2009

Table of Contents


Lending to Small Businesses by Financial Institutions in the United States
by Charles Ou and Victoria Williams

An Examination of Financial Patterns Using the Survey of Small Business Finances
by George W. Haynes and James R. Brown

How Strong is the Link between Internal Finance & Small Firm Growth? Evidence from Survey of Small Business Finances
by George W. Haynes and James R. Brown

Who Needs Credit and Who Gets Credit? Evidence from the Survey of Small Business Finances
by Rebel Cole

About the Authors


This report was prepared with the help of many people. Rebecca Krafft served as project manager and layout artist. Rob Kleinsteuber designed the cover. Myles MacDonald, in-tern for the Office of Advocacy, provided key research and editorial assistance. Stefanie Haeffele-Balch, Mercatus Fellow, provided editorial assistance. Joe Sobota provided helpful editorial comments on all chapters. Kathryn Tobias provided historical insight and thoughtful editorial expertise. Victoria Williams served as contracting officer’s tech-nical representative on the three contract reports. All of these activities were carried out under the direction of Jody Wharton, director of information, and Chad Moutray, chief economist and director of economic research.


In these challenging economic times, we are often reminded of the importance of entre-preneurship as a means of re-energizing our nation’s economy. One of the top issues for small business owners in the current economic downturn is access to credit. Recent sur-veys show that small business lending standards have grown more stringent and loan de-mand has fallen. In general, small businesses have been squeezed on a number of fronts, making it even more important for them to control costs, (re)focus on their core strate-gies, and manage their cash flow.

The Office of Advocacy has long recognized the importance of financial issues to the small business owner. To highlight the office’s recent research on small business fi-nancing, we have combined four papers into this new compendium, Small Business in Focus: Finance. Future publications in this series will focus on other issues of relevance to small business owners, policymakers, and researchers.

This volume contains four papers. First is a working paper that my colleague Vic-toria Williams and I originally presented at the Academy of Entrepreneurial Finance meetings in September 2008. The other three were written by experts under contract with the Office of Advocacy. Two are by the team of George W. Haynes of Montana State University at Bozeman and and James R. Brown of Iowa State University, and one is by Rebel Cole of Krähenbühl Global Consulting.

Lending to Small Businesses by Financial Institutions in the United States. This working paper discusses developments in small business lending by financial institutions in the United States during the past decade. The paper includes an overview of U.S. small businesses as borrowers in the financial markets; a look at the credit and capital markets that serve small businesses; a look at the importance of loans from depository institu-tions; and the borrowing patterns of small firms—what they borrowed and from which suppliers. The paper concludes with a discussion of the emerging national market for small business credit cards.

An Examination of Financial Patterns Using the Survey of Small Business Fi-nances. This paper by Haynes and Brown examines changes in financing patterns be-tween the 1993 and 2003 editions of the Federal Reserve Board’s Survey of Small Business Finances (SSBF). The authors find that the percentage of small businesses using any kind of credit increased from 79 percent in 1993 to 89 percent in 2003. The largest in-crease occurred in the use of nontraditional loans, namely credit card loans. They also found that commercial banks remained the most important suppliers of loans to small firms, with more than 46 percent of small business borrowers acquiring 50 percent or more of the value of their loans from commercial banks; however, the percentage of small businesses borrowing from commercial banks declined while the percentage using finance companies increased significantly between 1993 and 2003. This research is sup-plemented by an online statistical addendum of 234 tables generated from the SSBF which detail lending to small firms.

How Strong is the Link between Internal Finance and Small Firm Growth? Evi-dence from Survey of Small Business Finances. The second paper by Haynes and Brown discusses financial characteristics of growth firms in the United States using the SSBF. The paper concludes that “while outside capital is often needed, internal capital is criti-cally important for small business growth.” Internal funds were found to be particularly important to the growth of very small firms and women-owned firms.

Who Needs Credit and Who Gets Credit? Evidence from the Survey of Small Business Finances. Cole’s study assesses the credit availability of four categories of bor-rowers: successful borrowers, non-borrowers, discouraged borrowers, and denied bor-rowers. His detailed comparison of discouraged versus denied borrowers shows that while the discouraged borrowers resemble denied borrowers in many respects, the two groups are significantly different along a number of dimensions. This finding calls into question previous studies which have lumped both the denied and the discouraged bor-rowers into a single group in analyzing credit allocation.

Overall, these research studies highlight two things: the important role that finan-cial institutions play in lending to small business owners, and the value of quality data sets in ascertaining financing issues faced by small businesses and their owners. It is im-portant to note that the Survey of Small Business Finances will no longer be sponsored by the Federal Reserve Board. In its place, the Federal Reserve Board will use the 2010 Survey of Consumer Finances to collect information on the finances of business-owning households. We hope this new data option will allow us to better understand future de-velopments in small business financing.

Charles Ou, Ph.D.
Senior Economist
Office of Advocacy
July 2009

To view the complete report please see the attachment below.

Wednesday, July 1, 2009