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Frequently Asked Questions about Small Business Finance


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Created on March 17, 2014
 

The following is an excerpt from Frequently Asked Questions about Small Business Finance

Dollars bills and question markWhat is the lending picture for ventures owned by women, veteran, minorities, and immigrants?

Women-owned businesses (just like their male counterparts) largely depend on personal finances; but women-and minority-owned firms are more likely to use credit cards for startups and expansion. Women are 30 percent more likely than males to start businesses without seeking financing, and only half as likely to obtain business loans from banks. Hispanic- and African-American owned firms are more likely than other business owners to rely on owner equity at startup. Veteran-owned businesses’ use of credit for startup and expansion was similar to other businesses. For example 11 percent of veterans used credit cards and 8 percent used bank loans for expansions, while the figures were 13 percent and 9 percent, respectively, for all firms.

The sources of startup capital used by immigrant businesses do not differ substantially from those used by non-immigrant firms. However, their heavier-than-average reliance on credit cards negatively affects a business by displacing a personal relationship with a bank, which is often the source of less costly financing that is tailored to a business’s needs.

What is the outlook for crowdfunding?

Provisions within the Jumpstart Our Business Startups (JOBS) Act of 2012 authorizes the sale of stock by small businesses and startups over the Internet crowdfunding). A small business will be able to collectively raise up to $1 million a year. However, crowdfunding will not be an available option for small businesses until the Securities and Exchange Commission issues final regulations. The rulemaking process is underway; draft rules were issued in fall 2013.

Figure 4 - Percent of Venture Capital Investment by Stage, 2012 Expansion e 35%, Later Stage 32%, Early Stage 30%, Seed 3%What is the condition of the angel and venture capital market?

Angels are accredited investors who are qualified based on federal securities law. The angel capital market continued on a gradual upward trend in 2012 after being down in 2008 and 2009. More importantly, the angel market has shifted its preference to later stage investments (Figure 4). The venture capital market has remained relatively flat in both number of deals and investment dollars since the bubble burst in 1999-2001. However, 2012 had the highest percentage of seed and early-stage deals counts since the mid-1980s.Venture capitalists have moved their focus to firms in the expansion phase.

 

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