6/27/2011 8:16:01 AM By
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 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.
6/3/2010 10:00:00 AM By
Understanding entrepreneurial exit at smaller businesses is a really complex and important topic given the aging entrepreneurial population of most developed economies. While the term "exit" in entrepreneurship is most often reserved for high-growth companies with large outside equity investors that want to cash out an investment, the majority of "exits" happen in small firms in manners which we know very little about. The topic is most important in family-owned firms but in reality it should be relevant in all businesses, particularly with the aging of new entrepreneurs
in the U.S. over the last decade.
One of the first pieces of research that I remember reading in my current position at the Foundation that caused a bit of an ah-ha moment for me was a piece by Brian Headd at the Small Business Administration
about the need to redefine success (and really failure) in entrepreneurship research. Brian’s main point was that when we look at firms that go out of existence the common perception is that the only outcome which can be deemed positive from a business demography perspective is one in which the firm continues to survive, not one in which the firm ceases to exist. But in reality, close to 30 percent of U.S. business owners whose business had ceased to operate still reported the business as being a success at closure. For me, this study was one of the first that really helped to challenge my own assumptions in building surveys because it made me realize that I was implicitly assuming all business exits were failures and I would have at the time used the terms interchangeably.
In hindsight, probably our biggest failing in the design of the Kauffman Firm Survey
was of the questions asked businesses who reported having exited the marketplace. Only through dialogue with researchers like Fabrice Cavaretta
has it become apparent to me how much more effort we should have put in determining what type of exit a firm had. But anyone that has tried to talk with a respondent about something which has failed, like a business, will know that it’s often not an easy conversation. Indeed, most of the times we have attempted to collect more information from exited businesses, our survey vendor on the project, Mathematica, has not had much success.
I haven’t come across many surveys specifically targeting recently exited businesses in the course of this job, but I did come across one recent effort from Belgium
which looks only at recently exited microbusiness owners. In general, I’ve seen a lot more interest in Europe in understanding how today’s business owners plan to transition their ownership stakes as many near retirement. I suspect that this research emerges (or at least was funded) to support policy efforts in this regard.
I am not sure that I have a lot more to say on the subject at this time but I am hoping others out there can point me to similar efforts internationally or more work here in the U.S. NFIB has some interesting factoids from a couple of their small business polls that I’d like to end with.
Families in Business, Volume 2, Issue 6, 2002, ISSN - 1534-8326
Owners and Managers, Volume 8, Issue 8, 2008, ISSN - 1534-8326
- Forty-eight (48) percent of family business owners would like to have a family member eventually take over operation of their venture. The number rises to five in eight among those whose firm employs 20 or more people. However, just 13 percent believe it is “very likely” that a family member actually will take over, though another 23 percent believe it is “likely.” Yet, only 7 percent of all operating businesses were inherited.
- About 9 percent intend to transfer business ownership to one or more family members within the next five years. Those planning the transfer average a little less than 60 years of age.
- Thirty-nine (39) percent say that they originally went into the business with one or more family members. Almost three-quarters of inherited businesses were transferred to more than a single family member.
- The principal owner still works for professionally-managed businesses in 55 percent of cases. He/she is semi-retired or retired in 19 percent of them; 17 percent work in another business that he/she owns; and 6 percent work for an organization that they do not own.
- Sixty-one (61) percent of professional managers think that it is “highly likely” that they will own and operate their current business at some point and another 11 percent think it is “possible.” However, just 35 percent of owners who are not managers in professionally-managed firms think that the professional managers in their enterprises are “highly likely” to own and operate the firm some day and another 8 percent think it is possible. It appears a considerable number of professional managers will not realize their quest.
- Twenty-eight (28) percent of professional/paid managers are family members of one or more current owners. Family members are much less likely to think they will eventually take-over (own) the business than non-family managers.
3/9/2010 7:00:00 PM By
The National Federation of Independent Businesses (NFIB)'s Index of Small Business Optimism is out for February 2010 and showed a small drop in optimism among business owners. Even more depressing than a one-month lull is the fact that the index has remained below a level of 90 for its longest period ever. Read more from the Wall Street Journal or on the NFIB website.
8/12/2009 1:44:49 PM By
5/31/2009 12:58:00 PM By
I have a lot of respect for the operation Denny Dennis runs at the National Federation of Independent Businesses (NFIB). Denny is in charge of the small business polls that NFIB releases eight times a year looking at small businesses (under 250 employees, I believe). NFIB, and I believe Denny, have been doing these continually for more than twenty years. In that time, they have covered a lot of questions which are interesting but would never get asked by most federal agencies. And in the last year they have taken the very forward-looking step of making all those survey questions available in a searchable interface which brings back both interesting survey data but also puts it in an easy to read format: 411 Small Business Facts
One of their weekly emails highlighted a recent question which I thought would have a lot of interest in the current environment:
Read the full question and take a look at other questions.
- Was one or more of the mortgages taken out on this property to provide capital for your business?
Twenty-six (26) percent of small employers who own their residence and have a mortgage on that property had one or more of the mortgages taken out on this property to provide capital for their business (Q#18d). Eighteen (18) percent of small employers took out one or more mortgages on their residence to provide capital for their business (Q#18d).