2/11/2011 6:03:58 AM By
On the heels of my posting earlier this week describing global trends in small business lending
, the U.S. has new national and state-level data available today
from the Small Business Administration. While I would like to say that this data is about "small businesses" I would reminder readers that really these are data about "small loans" (under $1,000,000) and really small loans (under $100,000). While this might be a proxy for small business lending, I don't think anyone can legitimately argue that it's a full representation of the reality. That said, it's the best we have in the U.S. currently. Arg.
The SBA is reporting a smaller decrease in all categories measured than was seen in 2008-9. But a decrease is still a decrease; it seems the mid-tier loans ($100,000-$1,000,000) continued to be the hardest hit. Specifically the study found "the smallest business loans under $100,000 began to stabilize in 2009-2010—the total was down by 1 percent...[overall] small business lending dropped by 6.2 percent, less than the 8.9 percent drop experienced in large firm lending over the 2009-2010 period."
One new feature of the SBA's website this year seems to be better automation of the data tables and information underlying the state-level data. I think this is something that many scholars studying state-level effects will have some interest in. The data still suffers greatly from the bias of not knowing where the businesses were located that received the loans. For example, Bank of America only shows up in the North Carolina data (from those spreadsheets I examined) since it's headquarters is there. Still, I like the increasing accessibility of this data from the SBA.
2/8/2011 6:04:56 AM By
I have spent a good deal of time over the last four years working on surveys asking individual companies about how their business activities are financed. It’s been amazing in that process to see how differently the topic must be discussed in Europe and the United States. Specifically, topics like credit card financing, which are a mainstay of U.S. surveys, don’t event make an extended pick-list of financing types used by most European small businesses. I bring this up to illustrate that international comparisons of financing mechanisms for small business are a tricky thing. And yet, we all yearn for more comparable data (or any data at all!). Today I wanted to describe a couple of fairly recent surveys focused on small business financing data internationally.
Asking the Firm about Financing
Completed every six months, the European Central Bank Access to Finance of SMEs
is a large-scale survey of establishments in the EU zone looking at changes in conditions but not gathering nominal values of loans. It has a nice questionnaire
that keeps things simple although the overall effort is a bit limited in that it's bypassing official statistical systems and doesn't have the ability, as I understand it, to link reported credit conditions to firm outcomes in later periods. It's most recent report summarized that “between March and September 2010 the proportion of SMEs reporting a worsening in access to bank loans, at 24%, almost halved compared to the previous survey, when it stood at 42%. At the same time, 12% of SMEs reported an improvement in access to bank loans, compared with 10% in the previous round.” This seems to show that the debt financing options for European SMEs are still getting worse but not as quickly. This is a good example of a survey gathering perceptions from businesses. The recently reviewed NFIB survey
also comes to mind here.
Asking the Regulator (or Bank) about Financing
The other route that can be followed in gathering data is to go to the providers of capital. In most cases, in small business financing this means looking to providers of debt capital. A new paper by the World Bank titled “Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set
” describes an aggregation of SME financing data of this types from multiple countries around the world. This arises from some of the efforts of the World Bank and G-20 to aggregate data from central banks and other administering agencies about the size and quantity of loans to small businesses in their country. Asking regulators about loans is quite different than the above described establishment surveys. The advantage of the second approach is that it’s much cheaper but as the authors outline, there are huge definitional differences across countries in how SMEs are defined.
From table 2 of “Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set”
The above shows the U.S. definition which centers on loan size, not employees or revenues of the business; I find this to be highly unsatisfactory. So while I applaud this G-20/World Bank effort, I personal still don’t think it’s a full substitute for a quality establishment survey. That said, outlining some of these differences in definitions is the first step in pushing towards further agreement on appropriate definition and comparability. The authors have tried to make global estimates on the size of small business lending, finding that $10 trillion flows annually to small business loans but that this is disproportionately higher in developed economies. Additionally, they believe the differences in definitions are not driving the difference between developed and developing economy levels of small business financing.
While there is much to applaud in the ECB survey, they still have work to do in regard to their sample. Specifically, it does not appear to me that their sample is adequately covering new and young firms. While they have about 2 percent of firms responding that they are under 2 years of age, that is dwarfed by those firms age 2-4 years (8 percent of their sample). This would appear low by all estimates I can think of coming out of the OECD and other international sources. And indeed, in this turbulent time we have shown the importance of tracking new business finance separately as these are the firms most likely first effected by the downturn and any credit tightening. Take a look at Spain’s statistics on new business registrations, as an example, which have halved in the last year. The discussions about small business financings too often are portrayed as the same as new business financing. They are not and more effort needs to be made to have samples which allow for representative studies of credit conditions faced by new businesses.
A Compliment and A Call
But it’s great to be squabbling on the details of the ECB effort while the U.S. remains devoid of meaningful ongoing federal collections at the establishment level. Our own Kauffman Firm Survey is the only longitudinal effort collecting annual debt and equity injection information on U.S. businesses but it’s only one cohort. How we are not demanding more on business financing is baffling to me. Communities everywhere in the U.S. want to know what is happening with their small business credit conditions.
2/3/2011 8:27:30 AM By
With unemployment rates stubbornly high and the global economy increasingly competitive, the United States needs to better understand businesses, policies to support businesses, and, ultimately, how to spur job creation. Jobs don’t just appear or disappear; they are created (and destroyed) by businesses that are reacting to market conditions and opportunities. While our national statistical system is increasing its capacity to produce statistics on these dynamic processes, policymakers could better target job creation programs if the statistical system collected more data about how businesses finance operations and investment in innovation, especially at the regional/local level. Further, to bolster the value of data currently produced, we need to nourish active data user communities to advance the substantive scientific understanding of job creation policies and educate policymakers about the importance and utility of the data.
Read more on the AmStat website
2/3/2011 7:59:21 AM By
Updated Post 2/3/2011
NFIB is out with an updated report on the state of small business credit as of the end of 2010. This is probably the most important annual report on small business credit that's produced in the United States right now because the Federal government doesn't have any meaningful ongoing monitoring of small business credit, a topic I have an editorial on in the forthcoming American Statistical Association magazine for February 2011. NFIB's current report is notable on many topics but I wanted to highlight a few that might be lost in their importance.
- Forty-eight percent of small businesses attempted to borrow funds in 2010 while 3 percent of small business reported attempting to raise equity capital.
Measuring attempts to get equity investments is very difficult and indeed we worked with NFIB on this question in their current survey. So, here, I think it's important to recognized the sheer magnitude of difference between those who seek debt rather than equity in a given year but also to realize that this 3 percent estimate is very imperfect. In my own opinion, equity investment questions are particularly open to differential reporting when asked in the very aggregate rather than by very specific categories/relationships.
- "Almost one-quarter (24%) of small employers currently use credit cards and no other bank credit source. The overwhelming majority of this group does not appear interested in obtaining more credit."
The U.S. seems to be uniquely placed among countries in the proportion of small businesses using mainly credit cards for financing. I am not surprised by this statistics but I thought their second conclusion that for a very specific group of business owners, credit cards are all that is needed and they are not seeking addition financing.
- The percentage of small employers applying for credit fell from 55 percent in 2009 to 48 percent in 2010. The percentage approved for credit rose somewhat, leaving about the same number accessing credit in 2010 as accessed it in 2009.
This is why these types of questions are important in a time series. Even though the same number of businesses appeared to get credit there was a large shift in those applying.
- If an application for a line or a loan is rejected, it pays small business owners to try at a second or third institution. While the success rate declines with each successive institution approached, approvals appear high enough at fall-back institutions to warrant the effort. Beyond attempts at three institutions, success appears rare. Cards are different. Ninety-five (95) percent of apply- cants got one on the first attempt or did not get one at all.
This last point was interesting I thought particularly for small business owners. I don't know of an other place that gathers information quite like this.
Original Post 6/10/2009
Today, Kauffman is hosting a conference in New York discussing "Financing the Entrepreneurial Recovery." Although I am not attending, I thought it would be helpful to highlight the topic of finance and survey questions and some example survey questions which are being used by the National Federation of Independent Businesses (NFIB) to track small business financial conditions. Let us start with an extract from June 2009 Small Business Economic Trends on the credit markets:
Overall, loan demand is down due to widespread postponement of investment in inventories and historically low plans for capital spending. Cash conservation is a top priority in uncertain times. In addition, the credit worthiness of many potential borrowers has deteriorated in the recession, leading to more difficult terms and higher loan rejection rates (even with no change in lending standards). Twenty-eight (28) percent reported all their borrowing needs met (down two points) compared to nine percent who reported problems obtaining desired financing (up one point; not seasonally adjusted). The net percent reporting all borrowing needs satisfied fell 3 points to 19 percent. The percent of owners reporting loans harder to get rose to 16 percent of all firms, the highest reading since the 1980-82 recession period. So, it appears that as the recession drags on, financing becomes more difficult to arrange. But only 5 percent of the owners reported “finance” as their #1 business problem, up a point from April, but statistically unchanged for years. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted net negative 15 percent (more owners expect that it will be “harder” to arrange financing), 3 points worse than the April reading.
While the actual results here are very interesting and nuanced, let's turn to the questions used to gather this information. I am very thankful to Denny Dennis at NFIB who was nice enough to pull these questions for me for some research we are doing for an upcoming OECD-Kauffman workshop.
- 18. If you borrow money regularly (at least once every three months) as part of your business activity, how does the rate of interest payable on your most recent loan compare with that paid three months ago? 1. Much higher 2. Higher 3. Same 4. Much lower 5. Lower 7. Inapplicable, do not borrow regularly
- 18a. Are these loans easier or harder to get than they were three months ago? 1. Easier 2. Same 3. Harder 4. Don't know
- 18b. Do you expect to find it easier or harder to obtain your required financing during the next three months? 1. Easier 2. Same 3. Harder 4. Don't know
I like this set of questions but did want to point out that there are only a few small businesses which regularly enough borrow money to answer this question. I looked quickly at a similar question we asked of the Kauffman Firm Survey population (new businesses in 2004) and found only about 12 percent reported applying for new or renewed loans or lines of credit in calendar year 2007. I don't see in the report the percentage of all small businesses which actually applied in the last three months but have to imagine it is biased towards the bigger firms in the sample.
- 19. If you borrowed within the last three months for business purposes and the loan maturity was 1 year or less, what interest rate did you pay? __________ % or Prime + ___________
This question appears to show a real drop in interest rates paid relative to previous years which would seem to make sense. The wording to this question would seem to capture a larger share of firms.
- 20. During the last 3 months was your firm able to satisfy its borrowing needs? 1. Yes 2. No 3. Did not want to borrow
We asked a similar question in the Kauffman Firm Survey this year but worded differently, "During calendar year 2007, was there any time when [NAME BUSINESS] needed credit, but did not apply because you or others associated with [NAME BUSINESS] thought the application would be denied?" The two questions actually look at slightly different things, satisfaction of borrowing needs vs. needing credit but not applying. It'd be interesting to understand how firms interpretted both questions. On a quick read, NFIB's question seems a broader and worded in a way which I suspect respondent firms would respond better.
- 25. Compared to three months ago: c. Is trade credit, that supplier financing of purchases: 1. Easier to get 2. Harder to get 3. No change 4. Never use trade credit
I don't know much about trade credit but have heard this reported in Europe as a real issue of concern.
- 3. What is the single most important problem facing your business today? (Please circle only ONE of the following.) 4. Financing & interest rates
Intereestingly, this question peaked in mid-2008 and now remains quite low in comparison to other options (namely sales). Their response categories for this set of questions appears fairly complete and has shown some huge movements in the last year or two.
- 7. Were your net earnings or "income" (after taxes) from your business during the last calendar quarter higher, lower or about the same as they were for the quarter before?
- 7a. If higher or lower, what is the most important reason? (Circle only ONE.) 6. Financing costs
Wow. This is such a diverse array of questions with seemingly something for everyone. Unfortunately, NFIB doesn't go back to the same firms over time so we can only get these index type of questions. It'd be great for research purposes if they were able to do more of a longitudinal sample if only for a year.
6/29/2010 4:00:00 PM By
Still lots of interest in small business financing information but to date no U.S. statistical agencies are stepping up to the plate to replace the Federal Reserve's cancellation of the Survey of Small Business Finance (Rebel Cole has an interesting piece out today
using this data for the SBA). John Tozzi has an article reviewing small business lending data
in the U.S. for Bloomberg Businessweek
. And, lastly, the G-20 SME Finance Working Group on Data has preliminary outcome steps
from a recent meeting of experts.
5/26/2010 3:00:00 PM By
Martin Kenney and Donald Patton of the University of California, Davis are making available to other researchers the "Firm Database of Initial Public Offerings (IPOs): from June 1996 through 2006, Version A." Interested scholars who would like to be emailed the data should contact Don. This was a database we featured at the 2007 Kauffman Symposium on Entrepreneurship and Innovation Data but at that time the data wasn't complete. Now, version A is done and Don and Martin have plans for several updates to the database in the coming year. So, without further adieu, here is the data base summary included with the data file:
This database is comprised of all de novo initial public offerings (IPOs) on American stock exchanges and filed with the Securities and Exchange Commission (SEC) from June 1996 through December 2006. In assembling the set of firms to be included we initially relied on Thomson Financial Venture Expert to generate a list of all IPOs over this time period. From this list the following types of firms and filings were excluded: mutual funds, real estate investment trusts (REITs), asset acquisition or blank check companies, foreign F-1 filers, all small business (SB-2) IPOs with the exception of Internet firms, and all spin-offs and other firms that were not true de novo firms.
Every firm going public must file a prospectus with the U.S. Securities and Exchange Commission prior to its initial public stock offering. The IPO is a defining event in the history of any firm, and it performs two functions. First, it provides the firm with capital so that it can continue its expansion. Second, after the IPO, the stakes of both management and investors, (subject to certain lock-up delays) becomes liquid. In return, the firm must conform to the reporting and transparency requirements imposed by the SEC under the Securities Act of 1933. One of the primary objectives of the Securities Act of 1933 is to require companies making a public offering of their securities to publicly disclose relevant business and financial information about their company so that potential investors can make an informed investment decision regarding the offering. To achieve this end the 1933 Act requires companies going public to file disclosure documents with the Securities and Exchange Commission, the most important of which are the general form S-1 registration statement and the 424B prospectus.
This database has been constructed directly from these registration statements and prospectuses. These documents were found on the SEC's Electronic Data, Gathering and Retrieval (EDGAR) website. Up until the advent of the SEC's EDGAR system, IPO registration statements and other SEC documents were filed in paper form in officially designated locations and libraries. Beginning in the 1980s the SEC began to provide Internet access to these documents through its EDGAR program, but it wasn't until June 1996 that public firms were required to file all of their documents in this format. Therefore a complete record of all IPO documents for firms going public only begins in June 1996, and this is the starting point of this database.
5/25/2010 8:00:00 AM By
Last year I posted on an effort at Eurostat to do a large-scale survey on Access to Finance
. Since that time, more than a year has passed and it looks like Eurostat is much further down the line in developing this survey. I haven't been tied very closely to their efforts since then because over time what they are attempting to do and what we have done with the Kauffman Firm Survey (KFS)
have diverged. I am actually really pleased that this has happened, in a way, because Eurostat made some very important decisions early on in conceptualizing their study that limited its ability to gather comparable data to the KFS and the new version of their survey seems much more realistic in the content it collects and likely to get comparable data across European countries.
The minutes from the most recent expert meeting
on the survey and the draft survey instrument
show a survey effort that has gelled on trying to determine how the relationship has changed between 2007 and 2010 between small firms and debt/equity markets. This survey is notable because it is one of the few which asks businesses about attempts to access equity markets (and debt), not just actual equity or debt received. Now, while this is a solid instrument and they face a lot of limits in the length of the survey, I would have concerns about the complexity of concepts used here with no definitions (like factoring) and the reliability of the data as a result. The saving grace may be that the survey skirts most respondent fears by not actually asking for specific dollars received or other sensitive topics only overall use. The other downside is there is no way to gather data on the experience of the companies that didn't survive 2007 to 2010, an obviously tumultuous set of years where access to finance may have been a critical factor in their sustainability. Additionally, these national statistical offices, which already have a significant amount of rich microdata, are gathering data through this survey that is least helpful to them in matched microdata analysis. While they get a lot of directional feedback from businesses, they don't get specifics - like amounts - which for research purposes would have been so much more valuable when matched with other business data already on record. But I have to keep reminding myself that the national statistical offices are not actually charged with performing the research which could really inform policy in this area; they need to be good stewards of the data and try to achieve high response rates so that tabular information can be published and sent to Eurostat.
Eurostat has a tough task in organizing a survey like this since they never actually have the microdata and don't carryout the country-level collections. I admire them for taking on this important and tough subject but do so wish that the European regulations were different and that this enormous effort could be used to create a rich research data set which would go so much further in advancing research and understanding in this area than the aggregate tables and limited reports which this effort will produce. Don't even get me started on the fact that no non-European countries will be fielding replications of this effort (to my knowledge) when it happens even though this has been in the planning stages for more than three years.
5/7/2010 12:18:10 PM By
We have released 2008 data for the Kauffman Firm Survey panel of new businesses (public-use data
and NORC Data Enclave confidential version
). Covering the fifth year of operations, this data will provide new insights into how the recession has impacted young businesses in the U.S. We will be releasing an overview report on the data next week.
I wanted to point out one area of inquiry that we added to the questionnaire in 2008
that I am anxious for people to examine - investments in intangible assets. Specifically, we added the following series of questions:
- F19b. Investments in intangible assets are expenditures expected to produce long-term benefits for businesses. I'm going to read you some types of intangible assets. When thinking about each category, please consider the cost of in-house activities in these areas including the time of the business owner(s), as well as services or license fees from outside providers. Did [NAME BUSINESS] have expenditures in [ITEM] in calendar year 2008?
a. The design of new and improved products and services
b. Investments in software or databases?
c. Brand development such as advertising or marketing?
d. Organizational development such as company formation expenses or
e. Worker training?
f. Any other intangible asset investments? (SPECIFY)
- F19c. Thinking about all the intangible asset expenditures [LIST IF NECESSARY] you just told me about, please estimate [NAME BUSINESS]'s total expenses on intangible assets for calendar year 2008.
And the initial summary findings from 2008 on this topic are:
- Half of firms made investments in intangible assets in 2008, compared with just 14 percent of firms investing in research and development (R&D). Intangible asset spending averaged $28,000 in 2008, while average R&D spending was more than $54,000. High-tech firms are much more likely to have patents, copyrights, or trademarks. R&D investment and investment in intangible assets also were much higher for high-tech firms than for non-tech firms in 2008.
If you are interested in reading more about the conceptualization behind these questions or other international work in this area, there is a working paper presented at the American Economic Association
available and I believe future iterations of it are planned. In 2009
we will repeat the questions used here and expand the expenses question so that it is asked about each subcomponent reportedly used by the firm. Understanding further what sorts of investments businesses are making in what they perceive to be long-term payoffs is an important contribution to the more accurate measurement innovation so I can't wait to see what researchers make of this information!
I want to give a big thanks to the Kauffman Firm Survey team for their continued outstanding work on this eight-year effort. Alicia Robb continues to show tremendous leadership as principal investigator and Dave Des Roches at Mathematica runs a tight ship in collecting the data. The fact that he and his team have been able to maintain an above 80 percent response rate in the fifth year of the panel is amazing. Tim Mulcahy and team at NORC have a great product in the Data Enclave. We are really excited to have Juan Carlos Suarez Serrato helping out as a part-time research assistant and John Mueller and Chris Crawford helping to develop the KFS Data Wiki (more on that in the next few weeks).
3/12/2010 9:00:00 AM By
The WSJ has a new listing out of "promising" young firms
that might be of interest to readers. This list is a classic example of why people default to using venture capital data frames: 1) venture capital is perceived as a good proxy for "innovativeness" and "high-potential" and 2) the data can be disclosed with actual business names. But I'd caution readers to remember that venture capital funding is historically coast-centric and that while venture capital data is often a helpful starting point for considering innovation young firms, it is not often an ending point. The majority of young, high-potential firms in the country will exist for years before receiving venture capital backing (if that ever occurs).
1/22/2010 3:00:00 PM By
For some time I have stayed away from venture capital data. It is very popular territory for academics to research in as it is data rich (or at least data are readily purchasable, if very expensive); often includes actual company names that can be used in research through matching, surveys, or other web scraping; and VCs are just sexy (at least within the range of topics studied within entrepreneurship). Personally, I have chosen not to focus on VC data since it seemed just about everyone else was. My comparative advantage was to study the more boring topics like financing patterns in non-VC companies, angel capital, and just about any other topic. But I've avoided educating myself for too long, so please help me.
But VC data, although arguably the most developed in the entrepreneurship space, is so messy and debatable. Take for example this posting by Brad Feld
which points out many errors he is aware of in the published PWC Moneytree data. Now, Brad wasn't really concerned here with the accuracy of the underlying data but was pointing out that the data is really difficult to use in looking at start-up funding. Most VCs actually fund companies which the academic community would consider beyond start-up phase.
So, I don't have a lot more to say right now on this, but I wanted to throw this out there in the hopes of getting some comments on the different VC databases, as well as their perceived strengths and weaknesses. I know the basics on the data here but I am really hoping that readers will provide some education. Many thanks in advance.