September 26, 2016

Better Serving Small Business

Stephen Matteo Miller

Senior Research Fellow

Vera Soliman

Research Assistant
Summary

Small businesses come in many varieties, ranging from neighborhood kiosks to emerging tech and biomedical innovators. Effective regulatory policy should embrace that diversity. Better serving the small business landscape requires building a regulatory framework that encourages competition, innovation and accurate credit risk analysis.

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While it's new firms that tend to drive job creation, small businesses overall play an important role in the economy. In 2013, roughly half of all jobs and wages earned were through small businesses. And as Goldman Sachs' Head of Global Investment Research Steve Strongin pointed out earlier this year, as of 2013 there may be more than 600,000 fewer small businesses than if we'd not had the 2007-2009 crisis. Since politicians often blame others for economic woes or claim responsibility for economic successes, it's no surprise that small businesses serve as a talking point this election season.

For instance, Democratic presidential candidate Hillary Clinton pledged to "break down barriers so that starting a business can be as easy as setting up a lemonade stand in the front yard," though regulations even seem to be getting in the way of that these days. Nevertheless, the objective of making it easier for small businesses to fund themselves has broad appeal with Americans of all political stripes. Figuring out how businesses fund themselves and what obstacles they face is the first step toward thinking about effective solutions to address the constraints on access to capital for small businesses.

A new working paper, coauthored by one of us and published by the Mercatus Center at George Mason University, surveys the literature to provide an overview of what academics know about these issues. The studies surveyed in the research identify the most common sources of startup and expansion financing for small business expansion. Personal savings serve as the predominant source of startup financing, and to a lesser extent ongoing financing. More recent research confirms the importance of external financing, especially bank credit, as a source of capital for these firms to keep their doors open. Credit card use has also increased among small business owners.

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