A comparative analysis of the US and EU retail banking markets - Wsbi

6.2.3 Small business/ SME lending 319
6.2.3.1 United States
6.2.3.1.1 The main means of financing small
businesses in the US
Comprehensive and up to date data that directly
measures the financing activities of small businesses
in the US is hard to come by. Commentators on the
financing of small businesses in the US use as their
main data source the Survey of Small Business
Finances 320 (SSBF), which collects information on
businesses with fewer than 500 employees.
This survey, for which the most recent available results
date from 1998, provides the most comprehensive
information on small business finance available in
the US. Though the survey is not recent, its results
are used as the main source of data in a 2002 report
to Congress on the availability of credit to small
businesses 321 , and the report gives the explanation
that “past surveys suggest that the 1998 results should
still provide a good picture of current small business
behaviour because patterns in the use of credit by
small businesses change slowly”. The following
comments are also based on the 1998 SSBF.
Small businesses in the US rely substantially on insider
finance in the form of owner’s capital, owner’s loans,
and retained earnings 322 . Otherwise they roughly rely
equally on both equity and debt, the biggest equity
category being funds provided by the principal
owner (about two-thirds of total equity) 323 .
These are firms with very high growth potential,
often in knowledge-intensive high tech industries,
who principally access the private equity markets for
early-phase financing. External finance as represented
by ‘angel finance’ and venture capital, contributes
around 5% of small business finance in the US 324 .
Looking at private debt in more detail, the results of
the SSBF survey reveal that most small businesses in
the US use traditional types of credit, including loans
taken down under lines of credit, mortgages used for
business purposes, equipment loans, motor vehicle
loans, capital leases, and “other loans.” In 1998, 55%
of small businesses used at least one of these traditional
forms of credit.
Credit lines 325 were the most common traditional form
of credit used by small businesses in 1998. They were
used by 27.7% of all firms and accounted for 34.1%
of the total dollar value of credit outstanding. Motor
vehicle loans were the second most commonly used
type of traditional credit, with 20.5% of all firms
using them. These loans, however, accounted for
only 5.5% of the total amount of outstanding credit
because motor vehicle loans are small compared
with other types of credit.
Approximately 13.2% of all firms had mortgage
loans for business purposes, making this the third
most commonly used type of credit. In terms of
dollar amount, mortgage loans were the largest
form of credit, accounting for more than 35% of
outstanding credit.
For the vast majority of small businesses in the US,
their access to external finance is nearly entirely
limited to the private debt markets. For a relatively
small number of firms, however, the market of choice
for external finance is the private equity market.
319 While there is no single definition of a small business in the US, a broad guideline used by the US Small Business Administration (SBA) is a firm or enterprise
with fewer than 500 employees. In the European Union, SMEs are defined as having less than 250 employees. The analysis that follows therefore compares
small businesses in the US to SMEs in the EU.
320 The Survey of Small Business Finances (SSBF) is conducted by the Board of Governors of the Federal Reserve System. It collects information on small businesses
(fewer than 500 employees) in the United States. Owner characteristics, firm size, use of financial services, and the income and balance sheets of the firm are
just some examples of the types of information collected. Working papers and methodology reports, codebooks and other related documentation, and the
full public data sets are available for the 1998, 1993, and 1987 SSBFs. Results of the 2003 survey had still not been released at the time of writing this study.
321 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
322 “Use of equity capital by small firms – findings from the surveys of Small Business Finances (1993 & 1998)”, Dr Charles Ou, Office of Advocacy, US Small
Business Administration, May 2003.
323 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
324 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
325 Consists of an agreement between a borrower and a lender that permits an extension of credit, up to a certain limit, without having to complete a loan
application for each amount of money borrowed. The borrower may make as many purchases as desired as long as the limit of credit is not exceeded.
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