Uses of Equity Capital by Small Firms—Findings from the Surveys of Small Business Finances (for 1993 & 1998)

George Haynes and Charles Ou ()

The Office of Advocacy Small Business Working Papers from U.S. Small Business Administration, Office of Advocacy

Abstract: While the importance of venture capital to the growth of small firms has been widely discussed during the past decade, little is know about the uses of equity capital, especially internal equity capital, by majority of small firms in the United States. Information from the Federal Reserve Board's Survey of Small Business Finances provides a rare opportunity to examine this important issue. This paper utilizes the information collected in the 1993 and 1998 Small Business Finance surveys to investigate the uses of equity capital by small firms. We found that while the importance of public issue markets (IPOs) and the role of venture capital investment in promoting the growth of small dynamic firms cannot be denied, the importance of external equity capital in promoting the formation and the growth of small firms seems to be overstated. Only a very small number of small firms used external equity. In fact, the information on the uses of venture capital (equity capital from external sources) from the national surveys is too limited to permit a statistical analysis of the factors determining their uses by small firms. It is the internal equity capital, not external equity, that is one of the major financing sources for most of small firms in these surveys. A majority of small firms relied on internal sources of capital (owner’s capital, owner’s loans, and retained earnings) and external borrowing from financial institutions to finance their business operation and growth. There appeared to be a "pecking order" of borrowing from financial sources from internal sources to financial institutions to non- financial lenders. In addition, internal equity and commercial bank loans appeared to be complementary financial resources.

Pages: 22 pages
Date: 2003
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