SMALL BUSINESS FINANCE
The Future of Small Business Finance By Mike Paul
Commercial Banks
I was drawn to a financial services career in 1977 and believed banking would provide secure employment and a chance to use and develop my analytical skills. I also expected banks would offer
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WashingtonCPA Spring 2016
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“S
mall business is the backbone of the U.S. economy. Small businesses are primary job creators.” While these statements are popular sound bites during an election, it should be noted that newer firms, regardless of defined revenue and employment size parameters, are net providers of employment growth. What do we mean by small business anyway? The U.S. Small Business Administration defines a small business (eligible for 7(a) and 504 program financing) based on its industry, ranging from $750,000 to $38.5 million in revenues, and having 500 to 1500 employees. For purposes of this article, which reviews funding sources available to small business, let’s assume the definition of small business is closely-held firms with credit needs up to $1 million, excluding real estate financing. This is a more practical limit, based on the manner in which small business is served by lenders. There are two basic forms of support to a balance sheet - Debt and Equity. While the media often will describe both as “capital,” debt is a liability, structured to be repaid and is subject to repayment analysis, and requires historical cash flow adequate to service existing and proposed debt. Equity is ownership in the firm, and requires no repayment analysis, rather an assessment of the potential return on investment and the likelihood of a liquidity event at some time in the future. Now that those definitions are clear, let’s look at the various funding sources available to small businesses: commercial banks, credit unions, alternative financing, peer to peer lending and crowdfunding.
plenty of opportunities to serve walkin credit seekers. Nearly 40 years later, the analytical part remains paramount, job continuity was deeply impacted by deregulation of the late 1970s and 1980s and the following industry consolidation, and walk-in applicants, like the three martini lunch, was an illusion. For nearly 200
years, commercial lending was the nearly sole domain of commercial banks. The growth of both credit union membership and the information age has allowed other industries to serve small business. As a current practice, national and regional banks tend to segment commercial clients by revenue and or credit usage www.wscpa.org