Small-business financing after the financial crisis – lessons from the literature
| Date | 06 November 2017 |
| DOI | https://doi.org/10.1108/JEPP-D-17-00005 |
| Published date | 06 November 2017 |
| Pages | 315-339 |
| Author | David Wille,Adam Hoffer,Stephen Matteo Miller |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Small-business financing after
the financial crisis –lessons from
the literature
David Wille
The Mercatus Center at George Mason University,
Arlington, Virginia, USA
Adam Hoffer
University of Wisconsin- La Crosse, La Crosse, Wisconsin, USA, and
Stephen Matteo Miller
The Mercatus Center at George Mason University, Arlington, Virginia, USA
Abstract
Purpose –The purposeof this paper is to examinethe status of small-businesslending following the recession.
Design/methodology/approach –The authors survey the literature and analyze recent surveys of
small-business lending.
Findings –The results reinforce the importance of owner equity as a primary source of small-business
financing. In addition, the authors find that small firms have been seeking and obtaining less capital since the
2008 financial crisis.
Research limitations/implications –The findings about the main sources of small-business financing
will be informative when formulating financial regulation.
Social implications –The availableevidence suggests that newregulation of the financial servicesindustry
may be restrictingaccess to productsthat small-business ownersrely on and may adverselyaffect small banks.
Originality/value –The authors offer the most recent analysis of small-business financing, focusing on
changes that may have been caused by the recession and major financial regulations.
Keywords Small business, Financing, Entrepreneurship, Lending, Recession
Paper type Literature review
1. Introduction
We survey the literature on how small businesses in the USA finance themselves.
In addition, we survey research on changes to small-business financing over time, as well as
the major factors that may be driving those changes. Knowing how businesses finance
themselves, as well as how the sources of funding have changed over time, will be
informative when formulating financial regulation.
The conventional view of small-business financing holds that a firm’s access to external
capital is limitedby informational opacity. Thiswould force small-business owners to rely on
their own assets and on financing from friends and family during start-up and initial
operations. But recent research into the capital structure decisionsof small firms shows that,
while owner equity is indeed an important source of capital, small firms also rely heavily on
credit fromthe traditional financial servicesindustry as a source of financing for bothstart-up
and ongoing operations. We present recent survey data that reinforce these earlier findings.
The conventionin the literature is to use theUS Small Business Administration’s definition
of a small businessas one that has fewer than 500 employees,less than $7.5 million in annual
revenue, or both,and we use this definition in ourpresentation of survey data (SmallBusiness
Administration, Office of Advocacy, 2014)[1]. As of 2013, there were 23 million non-employer Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 3, 2017
pp. 315-339
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-17-00005
Received 10 June 2017
Revised 2 September 2017
Accepted 4 September 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors would like to acknowledge Hester Peirce and Ben Klutsey for the authors’help with this
project. The authors are also thankful for research assistance from Elizabeth Martin and feedback from
audience members at the Public Choice Society Meetings and the anonymous reviewers of this manuscript.
315
Small-business
financing
businesses in the USA and nearly 6 million establishments with fewer than 500 employees,
according to the US CensusBureau’s Statistics of US Businesses[2]. This represents well over
99 percent of all private-sector businesses in the USA. Small firms also employed about
50 percent of the country’s workforce and paid about 50 percent of all wages in 2013.
Given that small businesses employ a substantial share of the US workforce, a
significant amount of academic research is devoted to studying the role that small
businesses play in job creation. For instance, Neumark et al. (2011, p. 22) analyze data from
the National Establishment Time-Series Database and find an inverse relationship between
firm size and net job creation –the smallest firms “generate a disproportionate share of
gross job creation.”Haltiwanger et al. (2013) confirm this finding with data from the Census
Bureau’s Business Dynamics Statistics and Longitudinal Business Database. However, after
controlling for firm age, these authors find no relationship between firm size and job
creation. Instead, it is new firms (which tend to be small) that drive job creation,
emphasizing the importance of business start-ups in employment. That said, using data
from 2008, Hurst and Pugsley (2011) show that only a small fraction of new firms added
more than one employee; heterogeneity among small firms seems an underexplored area
that will offer future opportunities for research.
1.1 Summary of findings from the literature on small-business financing
The primary lessons we draw from this literature review are the following:
•Research into the capital structure of small businesses confirms the important
role of external credit for financing and thus the important role of the financial
services industry.
•The available data indicate that small-firm financing remains weak, a trend that is linked
to the persistently low level of small-business lending since the 2008 financial crisis.
•Empirical research appears to show that changes in bank regulation beginning in the
late 1970s that opened the way for consolidation in the financial services industry did
not lead to a reduction in small-business lending, thanks in large part to the
widespread adoption of new small-business credit scoring (SBCS) technology.
•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. Well-functioning debt and equity markets help small firms.
•New regulation of the financial services industry since the 2008 financial crisis may
be restricting access to financial products that small-business owners rely on and
may adversely affect small and community banks, which generate about half of all
small-business lending in the USA.
1.2 Data sources on small-business financing in the USA
As Berger and Udell (1998, p. 3) write in their overview of the sources of data on
small-business financing: “The feature of small business finance that makes it the most
interesting to study, informational opacity, also has made it one of the most difficult fields in
which to conduct empirical research.”This statement remains largely true today, even with
the growth of interest in small businesses and their impact on the US economy. The studies
reviewed here that focus on the small firms generally rely on data from one of three surveys:
the Survey of Small Business Finances (SSBF), the Kauffman Firm Survey (KFS), or the
Survey of Consumer Finances (SCF)[3].
The SSBF is a nationally representative, cross-sectional survey of US for-profit,
nongovernmental, nonfinancial, nonagricultural businesseswith fewer than 500 employees[4].
The Federal Reserve Board conducted the SSBF every five y ears between 1987 and 2003,
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