Capital Limits: The State of Small Business Finance

It is very difficult to track capital for small businesses in any rigorous fashion. The Census Bureau and the Kauffman Foundation partnered to conduct the Annual Survey of Entrepreneurs (ASE), with the first survey covering 2014. Additional surveys covered 2015 and 2016. These surveys provide a nationwide baseline for investment data for small businesses and entrepreneurs, but the data is only available by state and for the fifty largest metropolitan areas.

The most common sources of business financing for young firms are the personal assets of the owner and the owner’s family. The reliances on these sources limits entrepreneurship to the wealthy. Since we do not know which opportunities will create value, it is important to increase the pool of risk capital beyond the small amount that the market provides, which can create opportunities for those without family resources.

Sources of Capital for Startups (less than 2 years old)

Source: Annual Survey of Entrepreneurs, 2014

A small percentage of firms are able to tap resources beyond their personal assets. For startups less than two years only, only 12 percent (120 out of 1,000) are able to access traditional bank financing and seven percent establish a credit account for their business. Five out of 100 firms are able to get a loan or investment from family or friends. State and local governments operate a number of business loan programs, but these are often out of reach for startup businesses where their only collateral is intellectual property. As a result, for firms less than two years old, 17 out of 1,000 access a government guaranteed business loan and only four out of 1,000 businesses are able to access a direct government loan. This leaves a lot of businesses out of the capital markets.

The Small Business Administration (SBA) publishes information on the lending activity they support through their programs. The SBA 7(a) Program provides loans for small businesses of up to $5 million to fund startup costs, buy equipment and more. Here’s what else you can do with 7(a) funds:

  • Purchase new land (including construction costs)
  • Repair existing capital
  • Purchase or expand an existing business
  • Refine existing debt
  • Purchase machinery, furniture, fixtures, supplies or materials

The Geography of Small Business Finance in Pennsylvania

Using the SBA data, we can dive deeper into what businesses are accessing these loans, where they are located, and what banks are involved. As an example, Fourth Economy created an interactive workbook that presents the SBA 7a loans in the state of Pennsylvania from 2010 through April of 2018. You can explore the maps and data by county.