Bank loans may be easier to get than we thought, but not for all businesses

February 13, 2013 at 11:24 am 2 comments

SCORE’s Small Business Blog posts today about a study by the National Bureau of Economic Research that finds that start-up firms actually rely more heavily on bank loans and debt financing than most people think. Given recent trends in bank lending, many small businesses have faced increasing barriers to accessing capital from traditional lending sources, such as banks, leading many to rely on personal debt, raising funds from their family and friends, and credit cards to finance their ventures. However, this study,  based on the Kauffman Firm Survey which tracks 5,000 businesses over time, has found that these firms actually use more debt financing:

  • Debt was used five times more than equity
  • On average 25% of the startup’s capital structure was in the form of a bank debt
  • The average bank loan was approximately $48,000
  • Only 25% of entrepreneurs used personal credit cards for financing

SCORE’s blog post concludes that small businesses should not give up on the idea of getting a bank loan. The post points out that a bank loan “may not be for every entrepreneur,” which is actually a very important point to make. While it is encouraging to see data showing that capital may not be as restricted as we think it is, it’s still important to question who might be getting these loans, and who might still be left out.

The NBER study actually begins to answer this question by discussing the impact of gender and race on the use of outside capital:

  • The average female-owned business had 5% less outside debt than the same male-owned business
  • The ratio of outside debt to total capital was 13% lower for black-owned businesses than for comparable white-owned businesses.

Our own study of small business lending in North Carolina found that while the large banks hold a majority of lending resources, there are disparities in where those resources are deployed. Small business lending by the larger banks is more concentrated in upper- and middle-income areas, compared to lending by community development financial institutions (CDFIs), which is concentrated in low-income areas. Banks’ investment in upper-income census tracts is 250 times higher than it is in lower-income tracts.

In the end, a working flow of capital is necessary for businesses of all types and sizes to start up and continue to grow. Banks play a big role in providing capital, but they do not reach everyone. The NBER findings are encouraging, but there are still many who are not served by the  mainstream financial sector. Other factors, such as gender, race, and income also come into play and impact whether or not entrepreneurs can access affordable capital.



Entry filed under: Banking, Banks, CDFI, Economic Development, Economy, Small Business. Tags: , , , , , , , .

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