One of the markers of big businesses, especially publicly traded ones, is they have many capital sources.
For small businesses there are basically only three:
- Equity capital from the founder(s) and investor(s).
- Retained earnings - profits left in the business.
- Borrowed funds, typically from a financial institution.
The lion’s share of all small business capital comes from # 3, bank loans. Consequently, since small businesses generate over half of GDP, it’s easy to see that the health of the banking industry, and its receptiveness to small business, is vitally important to the U.S. economy.
Periodically, we poll our audiences about their banking relationships, which we did again recently. We asked, “Which example best describes your recent experience with a business loan from a bank?” and here’s what we learned.
Almost four of ten of respondents to our unscientific poll said, “We have gotten a business loan from a bank in the past year.” About one fourth of our sample said, “We can get a loan from our bank if we need one, but we don’t want one.” Here’s the good news for the economy in these responses:
- The greatest number of our respondents wanted, qualified for, and got a bank loan;
- At this point in the recovery, most bank loans by small businesses are more likely to fund opportunities rather than to save the business;
- Added together, approximately two-thirds of our small business respondents are confident they have the ability to borrow capital when, and if, they need it.
Sadly, about one-third of our audience is still struggling with their capital requirements. Ten percent said, “We need a loan, but can’t find a bank that will loan to a small business,” and 27% reported, “We need a loan but haven’t tried because we don’t think we can get one.” In a healthy economic expansion, these two groups should total no more than 10% to 15%.
There are a number of economic and political issues making up the loose gravel that the U.S. economy is currently standing on as it struggles to find growth footing. But an improving banking picture for small businesses is definitely a good sign of economic healing and expansion potential.
Every small business needs a good banking relationship, so keep trying until you get one. But remember, the perfect form of capital is retained earnings, because it is profits, produced from sales you make to customers, that you were disciplined enough to leave in the business.
Retained earnings will make your banker very happy.
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