Where Small Business Owners Get The Money They Need

Many entrepreneurs, policy makers, and academics wonder where small business owners get the money to expand their businesses. Thanks to the efforts of researchers at the Census Bureau, we know the answer.

Source: Created from data from the Survey of Business Owners, U.S. Census

Above, I have created a chart that shows the fraction of small businesses with employees in need of expansion financing that obtain different types of capital, using data from the 2007 Survey of Business Owners (SBO), an effort to collect data on:

“. . .more than 2.3 million nonfarm businesses filing 2007 tax forms as individual proprietorships, partnerships, or any type of corporation, and with receipts of $1,000 or more.”

The SBO reveals seven important facts about small business financing:

1. The majority (51.2 percent) of small employers needing money to expand use either their own or family members’ savings or assets.

2. Business profits or assets are a key source of money to expand; 29.1 percent of small employers use this source of expansion financing.

3. Banks are an important source of expansion capital for small businesses; just shy of one-third of small business owners report using a bank loan to finance expansion.

4. Credit cards, both personal and business, are a common source of money for small business expansion, with one quarter of small employers needing expansion funds obtaining at least some of it from this source.

5. More than one-in-ten (11.4 percent) of small business owners report using equity in their homes to finance small business expansion.

6. Government-guaranteed loans and loans from the government, such as SBA loans, aren’t a source of expansion capital for many businesses; the SBO data show that less than 3 percent of small businesses needing expansion capital get money from this source.

7. Almost no small employers use venture capital to expand; the SBO data reveal that only about 0.5 percent use this source of financing.

36 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

36 Reactions

  1. Scott: Does this mean that it is a potential market for venture capital services targeting the small business sector?

  2. Nice work on this. It looks about right. I often talk of a continuum of funding moving from FF&F to SBA. Most people will put dollars into their business and are able to get a level of customer revenue that will sustain the operation and never need funding. As far as the VC piece most people don’t realize how few businesses really qualify for venture capital.

  3. How many of the small business owners surveyed didn’t realize that the bank probably got the SBA guarantee on the loan. I think the numbers are off here because the bank seeks the guarantee and not the individual.

    • I wondered the same thing. Most people don’t understand the relationship the SBA has with banks offering small business loans. They hear that the government (SBA) has money for loans, but they don’t realize that the SBA doesn’t loan money directly … the SBA is not a bank. All the monies available for loans that they guarantee are administered by banks. As a result, regardless of how much money the SBA offers, it can be quite difficult to get a small business loan now. Every bank that offers small business loans offers those based on their own criteria for lending. The SBA has no control over whether or not a loan is approved …. it’s all up to the loan officers and the individual banks they work for.

  4. I’m surprised to see how few people get money from venture capital. I thought that number would be much higher. Interesting. Personal funds and family is definitely the way to go, and it’s good to see that as the top source.

    • I agree with this. Without personal funds and probably help from family members and friends, hardly any enterprises can have the financial resources to take off. No wonder these rank the highest.

  5. I suspect that, since the numbers don’t total up to 100%, people are getting money from multiple sources. It’d be interesting (and perhaps scary) to see what percentage of business owners are going into debt (loans, credit cards, equity lines, etc.) to fund their businesses.

  6. First, I don’t like to see companies financing growth with credit cards. It’s awfully expensive money.

    Second, it seems like the SBA would want more expansion loans because a business that has a proven track record and is expanding would be a better investment than a new business (we’ve all heard the stats on new businesses).

  7. It’s bureaucratic red tape put in place to detour. That’s why all of that money isn’t making it to where it is needed most….

  8. Scott’s article puts everything in perspective. I would have thought that SBA loans would be a greater percentage, but they have to go through banks, which may be the problem. It doesn’t surprise me that family money is the major source.

  9. Adding the home equity column to the personal or family savings or assets column of your chart means that 62.5% of small business financing comes from real estate, commercial real estate, income producing real estate all used to backed loans or cash to create their working capital. Most of my business owning friends either own the building they are in and or income producing properties such as apartment buildings and commercial strip malls. In the past, they used these as collateral for loans to finance their working capital to grow their business. When banks won’t loan on the equity of commercial buildings, businesses cannot expand. Typical commercial loans may look like 30 year amortized loans but must be refinanced every 5 years. Business owners must then hold onto whatever cash they have in case the banks won’t renew and call the note. Then we have the President demanding we tax small business owners meaning we take away the small business owner’s cash being held to protect the equity in his real estate holdings. If the President is successful with this strategy, he might be following President Roosevelt’s path who took a serious economic recession and drove it into a depression. President Roosevelt hated business people too. It seems to me that we need to find some creative way small business owners can unlock the equity they have and feel safe they can use it for their working capital. In the mean time, as long as real estate is in the toilet, unemployment is going to remain high.

  10. That is just depressing…

  11. Everyone thinks first about breaking his/her own investment or asking for support from the family members so it was obvious to get that point ranked for most of the business owners and rest of the sources are important to know.

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