For Money, Small Businesses Look in the Mirror
Where do small business owners get the money to expand their businesses?
Well, we can thank researchers at the U.S. Census Bureau for the answer.
Using data from the 2007 Survey of Business Owners (SBO), they found that the majority - or 51.2 percent - of small businesses with employees in need of expansion financing use their own or family members' savings or assets.
The researchers reviewed more than 2.3 million nonfarm businesses filing tax forms as individual proprietorships, partnerships or any type of corporation, and with receipts of $1,000 or more.
Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University, took the data and created a chart that shows the fraction of small business owners that obtain different types of capital.
In fact, Shane reveals six other important facts about business financing.
The first two are that key sources of money to expand include a bank loan and business profits or assets, which came in at 30.1 percent and 29.1 percent, respectively.
"Credit cards, both personal and business, are a common source of money for small business expansion, with one-quarter of small employers needing expansion funds obtaining at least some of it from this source," he writes in a recent Internet post.
Shane notes that more than one in 10 (11.4 percent) of small business owners report using equity in their homes to finance small business expansion.
But government-guaranteed loans and loans from the government, such as U.S. Small Business Administration (SBA) loans, aren't a source of expansion for many businesses.
"The SBO data show that less than 3 percent of small businesses needing expansion capital get their money from this source," Shane says.
Finally, almost no small employers - about 0.5 percent - use venture capital to expand.
I remember hearing the acronym OPM, or "other people's money,' when I was looking for funds to grow my business back in the day. I even made a pitch to a local businessman, asking him to invest $50,000. He wisely turned me down.
In the end, I fell into the majority - I used family assets.
It's important to note that the Census Bureau findings are based on 2007 data, which preceded the economic downturn that started the next year.
Every small business owner knows how hard the past four years have been. While there is light at the end of the tunnel, the recovery has been slower than any in our nation's history.
Fortunately, many people are able to put dollars into their business and generate a level of revenue that sustains their operation without the need for additional funding. My hat is off to them.
The Census Bureau findings should ease the minds of policy makers and academics who have wondered where small business owners get the money to expand their businesses.
Of course, it means little if policy makers don't work with entrepreneurs to find ways to ease their access to capital.
There is too much money sitting on the sidelines, both in the private and public sectors. We need to get it back in play for the benefit of all.
Contact Ted M. Natt Jr. at (910) 693-2474 or firstname.lastname@example.org.
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