February 21, 2018

Small Business Capital Access

Small businesses are an important part of the American economy and society. They contribute to the unique fabric of the communities in which they operate, act as cradles of innovation, and enable society to draw on the talents of their founders and employees. Small business formation, however, has fallen to historic lows in the wake of the 2007–2008 financial crisis. Many factors are likely at play, but market observers have asked whether part of the problem is that small businesses are having difficulty accessing capital. Even if capital is available, it may not be available in the forms that fit small businesses’ diverse needs.

These concerns are driven in part by what is happening to banks. Banks—newly sensitized to risk by their experiences during the crisis, confronted with an expanding rulebook, and facing a new intensity by their regulatory examiners—may be less willing to make small business loans than they were before the crisis. The continuing downward trend in the number of small banks, a key source of small business financing, exacerbates concerns about the state of small business lending. The JOBS Act of 2012 responded to concerns about bank lending by opening nonbank financing avenues in the securities markets for small businesses. New businesses, including internet-based lenders like OnDeck and Square Capital, have also arisen to address the perceived shortage of small business capital.

The Mercatus Center, seeking to explore the status of small business capital access, released a literature review in 2016 where it observed that small-firm financing remains weak in the wake of the financial crisis. The study also noted that debt financing tends to be used for more conventional capital formation, whereas equity financing tends to be used for innovation because ideas cannot generally be used as collateral. Although there are some data available, the literature review also revealed a need for more data on small business financing.

The Mercatus Center at George Mason University, in conjunction with Hanover Research, conducted a survey of 445 small businesses in December 2016.

The survey was an opportunity to contribute to the knowledge base on small business financing. We wanted to dig deeper to understand how small businesses finance themselves. We undertook the survey to shed new light on a number of important questions. How do small businesses view the landscape for access to capital? What do they consider important when making decisions on how to access funding? What terms matter most to small businesses: The cost of the funds? The amount they can borrow? The amount of time it takes to get the capital? The obligations and restrictions on which the funding is conditioned? The control they must cede over their own business? What types of innovations are they interested in using in the future? What role does regulation play in enabling firms to access capital or in preventing them from doing so? How do they determine where to look for funds? How easy is it for them to obtain capital now? How has the small business financing landscape changed over time?

The answers to these and other questions help to paint a picture of the small business funding landscape that should help policymakers and the financial services industry as they think about ways to ensure that the market serves small businesses’ needs. The survey results also raise new questions that are potential avenues for future research.

In the pages that follow, I present the results of the survey. The survey team hopes that these data will be useful to policymakers, regulators, academics, journalists, market participants, and small businesses. Probing the drivers of small businesses’ capital access decisions, we seek to facilitate a more effective dialogue about what, if anything, should be done to improve the regulatory framework governing the market for small business capital.