How does a small business fund growth?

Large, publicly traded businesses have a vast array of options when they want to capitalize growth. Small businesses? Not so much.

In fact, there are only three primary sources of growth capital for a small business:

1. Equity capital from the founder(s) and/or outside investor(s).
2. A combination of operating cash flow and profits left in the business, aka, retained earnings.
3. Borrowed funds, typically from a financial institution.

Because borrowed money is the significant small business source of capital, we asked our radio, Internet and Newsletter audiences the following question: “In terms of using a loan to capitalize business growth, which of these four options are you more likely to choose?”

Those who said they would use a national or large regional bank represented 13% of our respondents. Independent community banks came in at 31%, followed by credit unions, at 22%. And those who chose the last option: “We don’t need no shtinking bank loan!” were 34% of our sample.

It’s not surprising that over half of our respondents would prefer a local capital source like an independent community bank or credit union. For over a decade, I’ve been telling small business owners that the most consistent banking relationships, through thick and thin, are with locally-owned institutions that practice relationship banking. The financial crisis of 2008-9 turned my advice into a prophecy.

That crisis shined a bright light on at least one unfortunate truth: Banks that are beholden to Wall Street analysts and the computer-generated credit score are fair-weather friends to small businesses. It’s likely that the same poll taken pre-2008 would have produced more than 13% support for these banks.

Those who chose the emphatic “no shtinking loan” option, representing the largest single group, track with the prevailing small business sentiment in other polls I’ve reported on lately. Many small businesses are just not yet ready to use financial leverage to fund growth.

This group is either among that two-thirds of small businesses that polls show are not experiencing growth, or are among the other third that are growing but have learned how to do so more organically, which is another way of saying, “We don’t need no shtinking loan.”

A small business should have at least one banking relationship with an independent bank or credit union.

I talked more about how small businesses are funding their growth in the new normal today on The Small Business Advocate Show. I also talked with my good friend and Brain Trust member, Gary Moore, founder of The Financial Seminary and author of several excellent books on investing, about the advantages of having a relationship with an independent community bank. Take a few minutes to listen and give us your recommendations of large banks or smaller community banks. with Jim Blasingame

How small business owners are funding growth with Jim Blasingame

In praise of the independent community bank with Gary Moore

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