Acquisition of Capital by Small Business

Abstract

B ABSTRACT: ACQUISITION DE CAPITAUX PAR LES PETITES ENTREPRISES Cet article presente les resultats d'une enquete portant sur le mode de financement de 96 petites firmes ,&tablies dans l'Iowa, entre 1980 et 1987. Taux de reponse: 25,6%. Les sources de financement se rdpartissent en moyenne entre 45% d'actions, et 55% d'emprunts. Environ 30% des entreprises ayant repondu, ont ete mises en operation avec 100% d'emprunts, et 30% avec 100% d'actions. Le haut pourcentage de firmes, financees A leur origine, par 100% d'emprunts, indique que le manque d'actions n'a pas vraiment entrave leur initiative. Les sources d'emprunts se sont revelees plus rares que les sources d'actions. La presentation d'un ensemble de projets d'entreprise a du,le plus souvent, accompagner les dossiers de demande de fonds de lancement. Pour les demandes de capitaux a long terme, obtenus apres la premiere annee de mise en operation, le document le plus reclame a du montrer un effort de planification budgetaire. Le type d'entreprise ou le montant du pret ont peu d'influence sur les modaliths d'application. New small businesses are a very important component of the U.S. economy. Small business employs a large percentage of the U.S. labor force and contributes to economic development through product and technological innovation and market evolution. Unfortunately, the failure rate of small businesses is very high. Dickenson reports that about 33 percent of small businesses are discontinued within their first year of operation, and about 67 percent within the first five years of operation. Nadu reports that better financing would improve the success rate of small business. The level of initial capitalization a small business obtains has a signif icant impact on its success. Undercapitalizaton is reported to be a major cause of small business failure. Small business success is also affected by the composition of initial capital (i.e., debt versus equity). Too much debt leads to liquidity problems, especially during the first year when high start-up expenses and low revenue are common. This article presents the results of a study that examined the capitalization experience of small businesses established since 1980. A mail survey of 375 small Iowa businesses asked about business characteristics, funds required to begin operations, and source and composition of initial and subsequently acquired capital. The survey results provide insight into how small Iowa businesses have been financed during the 1980s. These results may offer information on capital acquisition that can assist policymakers and owner/ managers in small business planning and development. No studies to date provide information about sources and combinations of equity and debt, the incidence and types of lending requirements, or differences in capital acquisition relative to type of business and size of debt versus equity. The few studies that have examined the acquisition of capital by small businesses suggest that initial financing is commonly a mixture of personal equity and bank borrowing. For example, a study of the financing patterns of 134 small Wisconsin businesses found that equity capital was obtained from the owner's personal funds and personal borrowing from banks, family, and friends. The specific combination of capital was tailored to meet the particular financing needs of the business.' In another study, personal equity and commercial banks were the primary sources of both initial and growth capital among manufacturing firms. Other sources of capital, such as the SBA and risk capital, were seldom used. SAMPLE AND METHOD The sample was drawn from businesses listed in the 1987 Iowa Business Directory. One-half of the sample was drawn from small towns (population 10,000). The sample was further portioned by dividing Iowa into four quadrants and selecting one-fourth of the sample from each quadrant. …

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