Back to Management and Support TalentBy Michael T. Childress and Michal Smith-Mello; Peter Schirmer
From Entrepreneurs and Small Business—Kentucky’s Neglected Natural Resource
pp. 46-57, published 1998
Most firms are launched with a relatively modest amount of cash. The Bureau of the Census’ most recent survey of small businesses in the United States found that 30 percent of all companies were started with less than $5,000, while 67 percent of all companies were started with less than $50,000.(1) As mentioned in the previous chapter, results from the Survey of Small Business Owners show that, while 13.8 percent of Kentucky’s small businesses were begun with $5,000 or less and 22.7 percent were started with $10,000 or less, the "typical" amount needed to launch a new small business is around $40,000.(2) Figure 1 illustrates the distribution of responses to the small business owners’ survey question: How much money (from all sources) did it take to launch this business? A majority (about 62 percent) of these businesses were launched with less than $50,000.
Figure 1: "How much capital does it take to start a business?"
Typically, the modest capital demands, particularly for microenterprises, are often met by the savings of the entrepreneur or his or her family and friends or by credit cards. Even the nation’s most successful firms, those whose growth rates warrant an appearance on the annual Inc. 500 list compiled by Inc. magazine, relied heavily on their own savings and the support of family and friends. Among CEO’s of 1997 Inc. 500 firms, 79 percent reported using personal savings, 16 percent also looked to family and 7 percent to friends; credit cards provided capital for 10 percent of the group.(3) Credit cards help keep many small businesses afloat, providing access to capital and goods for 39 percent of owners who reported using personal credit cards and 28 percent who used business credit cards in 1993. Among the smallest firms, those with fewer than 10 employees, 40 percent of business owners used credit cards, compared with 23 percent of larger firms, those with 50 or more employees.(4)
In Kentucky, over half of the respondents to the Survey of Small Business Owners (57.8 percent) indicated that they used money from personal savings, friends, or family to start their business, with $20,000 being the typical amount (i.e., median) coming from this source.(5) And 43.5 percent indicated they had obtained a bank loan to start their business, with $45,000 as the typical amount from this source. Entrepreneurs normally cobble together financing from multiple sources. However, as Figure 2 shows, money from personal savings, family, or friends and bank loans are the two main sources of start-up capital for Kentucky’s entrepreneurs.(6)
Figure 2: "Did you obtain money from these sources when you were starting your business?"
Is there enough capital available for Kentucky’s entrepreneurs?Many have argued that the lack of local sources for growth capital inhibits entrepreneurial development in the state. Indeed, when asked to identify the most significant obstacle to launching their business, most of the respondents to the Survey of Small Business Owners cited "financing" (see Figure 3).(7) Yet, when asked to evaluate access to financing in Kentucky, 29.4 percent of the respondents said "good," 45.2 percent said "fair," and only 25.4 percent said "poor."(8) And when asked to evaluate the process of acquiring financing for their business, nearly 69 percent of the respondents to the Survey of Small Business Owners said it was "appropriately demanding" compared with 31 percent who thought it was "overly difficult."(9) From the entrepreneur’s perspective, obtaining financing is one of the most difficult challenges in starting a new business, but the data suggest that capital is usually available for resourceful and qualified individuals.
Figure 3: "What was the most significant obstacle to launching this business?"
Surprisingly, fewer than half of small businesses in the United States seek external financing in a given year,(10) but those who do typically go to the bank. According to the findings of a 1993 small business finance survey conducted by the Federal Reserve and the U.S. Small Business Administration, "Banks are the dominant source of external financing to small firms," supplying some form of financing to 37 percent of small businesses.(11)
In today’s robust and highly competitive economy, many banks have abandoned reluctance to lend to small businesses in an effort to tap new sources of revenue. Some banks are actually advertising their willingness to make small business loans and, in certain markets, competing aggressively with one another for the opportunity to finance even risky ventures. Between 1994 and 1996, the number of small business bank loans for less than $1 million increased by 935,000, from 4,322,000 in 1994 to 5,257,000 in 1996. The value of these outstanding loans reached $163 billion, compared with an estimated $10 to $20 billion invested by so-called "angels" and just over $10 billion by venture capitalists.(12) Consequently, the nation’s most traditional lending source, the one that places high demands on would-be borrowers, is a significant player in small business development. Indeed, over 90 percent of the banks in Kentucky currently make loans to small businesses.(13)
Given the importance of banks to entrepreneurial development, the Center posed the following question to the state’s bankers: Some people say there is a shortage of capital for potential entrepreneurs in Kentucky. Others contend there is plenty of capital, but a shortage of entrepreneurs to use it. Which is closer to your view? The consensus of the state’s bankers seems to be that capital is less a problem than qualified entrepreneurs to use it. Around 32 percent of the bankers said "shortage of capital," while the remaining 68 percent said "shortage of entrepreneurs."(14) It is interesting to note the regional differences in Kentucky as well as the urban-rural split. As Figure 4 illustrates, bankers in the state’s urban areas are more likely than bankers in rural areas to believe a shortage of capital exists, a somewhat surprising result. Nonetheless, regardless of region or whether the bank is in a rural or urban county, a majority of bankers believe that capital is not in as short a supply as entrepreneurs to use it.(15)
Figure 4: "Is there a shortage of capital or entrepreneurs in Kentucky?"
A necessary but not sufficient condition for adequate capital to be available for burgeoning and established businesses is that banks be generally well capitalized. An analysis of financial data from Kentucky banks suggests that, on average, Kentucky’s banks are. Governmental regulations specify capital levels that must be attained for a bank to be well capitalized. A widely used indicator of capital adequacy is the leverage ratio (core capital to tangible assets). According to Sheshunoff, "Many regulators informally suggest that the leverage ratio for community banks should be at least 6 percent, and often ratios of 7 percent or 8 percent are required."(16) The average leverage ratio for Kentucky banks in 1996 was 10.3 percent, significantly higher than the recommended 7 to 8 percent;(17) the leverage ratios for Kentucky’s regions are 11.3 percent for the West, 9.7 percent in south central Kentucky, 10.5 percent in eastern Kentucky, and 10.2 in Kentucky’s urban triangle. These leverage ratios show that Kentucky’s banks have abundant capital.
Some may argue, however, that even though Kentucky’s banks are well capitalized, they may not be using their capital to support Kentucky’s small businesses and entrepreneurs to the fullest extent. For example, it is possible that Kentucky’s banking community prefers a more conservative investment approach than what would be entailed under one that relies more heavily on commercial lending. Fortunately, it is possible to gauge the perceived risk within a bank’s balance sheet by examining the ratio between the risk-based capital ratio and the core capital ratio.(18) Ratios under 2.0 suggest a less conservative mix of investments. The average ratio for Kentucky in 1996 was 1.73, which indicates that Kentucky’s banks are, on average, not overly conservative;(19) the ratios for Kentucky’s regions are 1.79 for the West, 1.71 in south central Kentucky, 1.75 in eastern Kentucky, and 1.68 in Kentucky’s urban triangle.
Moreover, an examination of Small Business Administration data shows that Kentucky’s banks are not shy about making small business loans. In 1995, Kentucky banks made 93,404 small business loans that were less than $100,000.(20) This is 24.2 loans per 1,000 population, which places Kentucky in the forefront of states in the region (see Figure 5). In short, these data support the argument that there is no shortage of bank capital available for Kentucky’s entrepreneurs.
Figure 5: Number of Small Business Loans for $100,000 or Less
Turning to venture capital, the story is not as good. Traditional venture capitalists meet the market demands of higher-end or later-stage firms and typically deal with hundreds of thousands or millions of dollars.(21) However, only six venture capital firms do business in Kentucky,(22) and many believe that the proclivity of early stage venture capitalists to invest "in the neighborhood" could constrain the growth of firms in Kentucky where few venture capital firms are within easy reach. One study in particular found that of 150 venture capital deals, totaling nearly $175 million, 125 (83 percent) were located within two hours’ travel time from the office of the firm that originated the financing.(23) As The Economist notes, "The reality is that venture capital is mostly a matter of managing and nurturing firms,"(24) and that is, by necessity, a hands-on affair. But hands-on has clearly taken on new meaning in the era of e-mail, fax machines and even video conferencing.
While much ado is made of the paucity of venture capital funds in Kentucky and the Southeast region as a whole, it is worth noting that no venture capital flowed into half the states of the nation during 1995 and 1996.(25) Few would suggest that all of these state economies ground to a standstill as a consequence. Indeed, only 3 percent of the CEOs of 1997 Inc. 500 firms report relying on venture capital to finance their firms.(26) In 1996, an estimated 75 percent of U.S. venture capital was invested in technology companies where, The Economist reports, speed is everything and the improbable exponential growth venture capital firms seek as a return on their investments is within the realm of the possible.(27) Today, U.S. venture capital flows principally into the technology nerve centers in and around Boston, Massachusetts, and Silicon Valley in California, where Price Waterhouse estimates that 30 percent of all venture capital in the United States was invested in 1995.(28) During 1995 and 1996, according to Venture Economics, Massachusetts was the highest ranked state in the nation for venture capital receipts, $406 in venture capital per person, followed by $130 per person in California.(29) In 1995, according to Price Waterhouse, firms in the South received just $1.5 billion or 21 percent of the $7.5 billion in venture capital invested nationally; a third of those investments went to communications firms.(30) Importantly, Price Waterhouse also found that, in spite of the tendency of venture firms to flock together, 20 percent of venture capital came from outside the state where it was invested, suggesting that the geographic reach of venture capital is farther than previously thought.
To learn more about the availability of venture capital to Kentucky entrepreneurs, the Kentucky Long-Term Policy Research Center conducted a 1997 telephone survey of firms in surrounding states that were included in the 1996 edition of Pratt’s Guide to Venture Capital Sources.(31) This survey sought general information about the availability of capital from venture capital firms and Small Business Investment Corporations (SBIC)(32) within a round-trip, one-day drive of Kentucky. Specifically, we wanted to learn whether venture capital is indeed strongly linked to "the neighborhood." Firms within an estimated three-hour drive from the Kentucky border were chosen because they would be relatively easy for an entrepreneur or a small business owner to travel to in a day.
The venture capital firms and SBICs surveyed are located in Indiana, Ohio, Tennessee and West Virginia. The breakdown of firms in each state, including Kentucky, is shown in Table 1. As illustrated, a total of 43 venture capital firms or SBICs are either located in Kentucky or within a three-hour drive.(33) Many are relatively new; among the firms we identified, nearly a third were formed in the 1990s. We assumed that Kentucky-based venture capital firms are investing in Kentucky enterprises and, therefore, did not survey them.(34)
Table 1: Regional Venture Capital Sources, 1997
Significantly, 85 percent of the (out-of-state) venture capital firms that responded expressed a willingness to invest in Kentucky businesses. Of the 32 respondents, 25 percent reported having previously had some equity in a Kentucky-based business. At present, however, only 19 percent have equity in Kentucky-based businesses, and these investments represent a relatively low percentage of net portfolios. No firm had higher than 20 percent of its portfolio invested in Kentucky businesses. Kentucky-based businesses have sought capital from 46 percent of the firms surveyed.
Figure 6: "Would you be willing to invest in a Kentucky-based business?"
Further, the findings of our survey indicate that, if the deal has enough merit, venture capital will indeed travel, certainly as far as the three hours in question here. When asked what they saw as the biggest obstacle to making loans in Kentucky, 75 percent or 24 out of 32 of these venture capitalists said they saw no real obstacle to investment in the Commonwealth beyond the need for a sound business plan and a solid management team. Indeed, a "neighborhood" or regional mission precluded only four firms from investing in Kentucky businesses, and the officer of one of these firms said she was encouraging stockholders to broaden its reach. Three other firms have adopted specific strategies that create obstacles of sorts because they narrow the focus of their firms to a particular industry or type of business owner, but all are willing to invest in Kentucky within the parameters of their missions. One firm lends only to minority or cash-strapped entrepreneurs. Another backs only biomedical businesses, which, were they located in Kentucky, would likely be of interest to it. Similarly, Batelle Venture Partners based in Columbus, Ohio, focuses only on firms with direct benefit to the natural gas industry. It has received Kentucky proposals, though it has never invested in a Kentucky firm. As one venture capitalist observed, "Kentucky is no different from any other state; the business must have a solid business plan and a strong management team." Officers of Capital Services & Resources, Inc. and Morgan Keegan Merchant Banking Fund II, L.P. in Memphis, Equitas, L.P. in Nashville, and Ohio Partners in Columbus, Ohio, as well as others, expressed keen interest in seeing more Kentucky firms seek capital. One Cincinnati venture capitalist observed that while the deal flow is lower from Kentucky than other states, those deals received are generally good.
Table 2: Surrounding State Venture Capitalists and Kentucky Firms
In conclusion, contrary to the oft-made assertion that too little capital is available to entrepreneurs, we find that sufficient, perhaps even abundant capital is available from both public and private sources. Indeed, with respect to venture capital firms in Kentucky and in neighboring states, there is over $675 million under management by these firms.(35) In the next section, we discuss some of the reasons Kentucky’s entrepreneurs might have problems accessing adequate capital.
Lack of information about where to get capital might be Kentucky’s entrepreneurs’ biggest problem. Indeed, MACED concludes that information about sources of capital, rather than the capital itself, may be the commodity in short supply in the Appalachian region.(36) Nonetheless, most entrepreneurs realize that banks are the dominant source of outside capital for small businesses in the U.S. and Kentucky (see Figure 2). What then are the factors most important to banks when making a lending decision? Table 3 shows the results from the following question on the Center’s banker survey: How important are the following items when deciding whether to lend to an entrepreneur starting a new business?(37) The results show that many factors are important, with some being relatively more important. Strength of management garnered the highest percentage of "very important" at 92 percent, followed by the strength of the business plan (77 percent), experience starting or running a business (67 percent), and collateral (55.2 percent).
Table 3: The Importance of Various Factors to Kentucky Banks When Making a Lending Decision
We also asked the bankers an open-ended question about the obstacles they experience in making loans to Kentucky’s entrepreneurs.(38) As Figure 7 illustrates, "lack of collateral" is the biggest obstacle for the bankers. Asset accumulation, therefore, should be a critical goal, particularly for poor and low-income individuals. The second most frequently mentioned obstacle is "poor or no business plans." Indeed, only about 39 percent of the businesses that responded to the Survey of Small Business Owners indicated they had a written business plan for their business.(39) So, clearly, loan requests to banks, the most common source of small business financing, must be supported with well-constructed business plans to satisfy these traditional lenders. Borrowers must bring more to the table than an idea.
Figure 7: Obstacles to Lending to Small Businesses and Entrepreneurs Cited by Kentucky Banks
Most small business owners we surveyed view the demands of financing as reasonable. As previously mentioned, when asked to evaluate the process of acquiring financing for their business, nearly 69 percent of the respondents to the Survey of Small Business Owners said it was "appropriately demanding" compared with 31 percent who thought it was "overly difficult."(40) What then, are some of the factors that help account for the difficulty in acquiring financing? We examined several factors, such as the gender of the entrepreneur, the location of the business, and the loan amount, to see if differences in these factors were associated with problems in acquiring financing. As Table 4 illustrates, neither the location of the business, the size of the loan, the ownership of the bank, the gender of the entrepreneur nor their experience appears to have a significant effect on the difficulty of acquiring financing. Paradoxically, if they had a written business plan, they are a little more likely to have answered "overly difficult." The only factor in Table 4 that shows a huge effect is whether SBA guaranteed the loan. Finally, we constructed a statistical model to estimate the independent effect of the variables listed in Table 4.(41) The only variable that is statistically significant (at the .05 level) is whether the SBA guaranteed the loan.
Largely as a result of consolidation, the number of banks in the United States declined from more than 14,000 in 1985 to about 10,000 in 1995, and about 60 percent of the banking market is concentrated in the hands of the nation’s 25 largest banks.(42, 43) If this trend continues, the nation will have fewer than 7,000 banks, and Kentucky will have fewer than 200 by 2005, down from 346 in 1982.(44) The 1995 acquisition of Louisville-based Liberty National Bank by Ohio’s BancOne is but one of many high-profile examples of bank consolidations. Other Kentucky banks acquired during recent years include Citizens Fidelity by PNC, Cumberland Bank by Fifth Third, and Kentucky National by National City.(45) Already, the five largest banking institutions in the state are owned by holding companies outside Kentucky.(46)
Figure 8: Kentucky Banking Institutions, 1982-2005
Because commercial banks are the principal providers of the loans that fuel entrepreneurship, trends that influence their disposition toward small firms affect business formation, revenue and employment. Some fear that bank consolidation, which has come in response to intensified competition for an array of financial products, has changed the dynamic between these lenders and small businesses. Small community banks generally recognize that their own success depends on the development capacity of the community, and huge multistate and national banks that snatch up community banks undermine the commitment to nurturing small business and local development, or so the story goes.
The evidence suggests that this story is inaccurate for a number of reasons. First, Kentucky’s largest banks—the top 20 percent—accounted for 48.5 percent of all small business loans and 55 percent of all small business dollars in 1996.(47) The bottom 20 percent made only 4.6 percent of the small business loans and loaned only 3.3 percent of the small business dollars. The nine banks operating in Kentucky with assets of $1 billion or more accounted for 25 percent of all money loaned by banks to small businesses. Small banks may be more inclined to make small business loans, but they do not approach the sheer volume of loans made by bigger banks. Second, about half of the small bank acquisitions are made by other small banks, and medium-sized banks make most of the rest.(48, 49) Third, banks that acquire other banks tend to be more aggressive small business lenders than either those they acquire or comparably sized banks not involved in a merger.(50)
Table 5: Small Business Loans and Dollars from Kentucky Banks, by Size of Assets
In fact, some observers have suggested that mergers and acquisitions may actually increase small business financing. According to the Missouri-based Rural Policy Research Institute:
Mergers among small banks in contiguous communities can improve the capacity of the bank to serve its community, as a result of greater financial strength, increased access to loanable funds, greater capacity to spread risk, and access to more specialized loan officer skills . . . If the credit needs of community businesses match the business focus and philosophy of the parent bank, lending in the community could increase. These mergers may benefit rural areas by bringing new banking skills and strategies to the local market, such as fee-based lending. (51)
Joe Peek, an economist at Boston College, and Eric Rosengren, a researcher with the Federal Reserve Bank of Boston, write, "Since acquirers are almost as likely to have larger as smaller shares of small business loans in their portfolios, compared to their targets, this suggests that not all mergers will shrink small business lending; many will actually increase it."
Our Survey of Bankers found that nearly 60 percent of Kentucky bankers believe that further bank consolidation in Kentucky will reduce available capital for entrepreneurs. However, this view was much more strongly held by banks that have not gone through a consolidation within the past decade. Among those banks that have undergone consolidation, two thirds say bank consolidation will have no effect or will increase capital availability for entrepreneurs.(52) Finally, even though the number of banks has decreased in recent years, the share of small business owners who have successfully acquired capital from a bank rose from 76 percent in 1987 to 83 percent in 1995, according to the National Federation of Independent Businesses. (53)
All of this makes a fairly compelling case that bank consolidation does not have a significant effect on small business financing. Still, many small business owners are uncomfortable with changes in the banking community. Among respondents to the 1995 National Federation of Independent Businesses survey, 25 percent reported that their primary financial institution had merged in the past three years, and many were unhappy about the consequences: 34 percent characterized the change as negative while only 7 percent viewed it as positive. Among the group responding, 17 percent reported that they had changed banks as a consequence of the merger.(54) Our Survey of Small Business Owners found that entrepreneurs are generally more satisfied with locally owned banks than they are with national or regional ones. Almost half rated the quality of local banks as good, while only one in four gave a similar rating to national and regional banks.(55)
While people may prefer the personalized services of local banks, their preferences have little to do with small business loans. Banks of all sizes are willing to loan capital when they are confident of a good rate of return. In fact, the real opportunities community banks hold for entrepreneurs may not be as sources of capital but as potential business ventures: the Federal Deposit Insurance Corporation reports that the number of bank charters in 1996 and 1997 was the highest in a two-year period since 1989-90.(56) Many of these businesses are started by former executives with other banks.(57)
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As
cited by Leslie Brokaw. Return to text.The
following question was asked on the Center’s Survey of Small Business Owners: (Q-17) How much money (from all sources) did it take to launch this business? The sample size is 428 and the mean, median, and mode are, respectively, $134,935, $39,500, and $20,000. When we say the "typical" amount needed to launch a new business, we are referring to the $39,500 median. This amount is similar to what bankers reported. In the bankers survey, we asked: (Q-15) How large is your institution’s typical (or average) small business loan for new small business start-ups? The sample size is 72 and the mean, median, and mode are, respectively, $60,600, $50,000, and $50,000. Return to text.Inc
., "The Inc 500: A Statistical Tour," Inc. Online, Internet: 31 Oct. 1997. Return to text.USSBA
, "Facts . . ." Return to text.The
question asked of the small business owners was: (Q-18) How much money did you receive from the following sources to start this business (Please provide the approximate amount from each source)? One of the options is "From Personal Savings, Friends or Family." The median value for this variable is $20,000. Return to text.The
summary statistics for the other sources are listed in Appendix F. However, the sample sizes are small and the summary statistics might not be representative of the universe of cases. Return to text.The
question on the survey is: (Q-7) What was the most significant obstacle to launching this business? Return to text.Refer
to Table 7 in this chapter. The question on the survey is: (Q-36) Based on your knowledge and experience, how would you rate the following factors which affect the ability of entrepreneurs to launch and grow small businesses in Kentucky? Are they good, fair or poor? (Circle a number for each factor you have knowledge about). Factor 18 is "Access to financing." Return to text.Survey
of Small Business Owners, (Q-19): In retrospect, do you believe the process of acquiring financing for this business was overly difficult or appropriately demanding? There were 360 responses to the question, with 68.6 saying "appropriately demanding" and 31.4 percent saying "overly difficult." Return to text.USSBA
, "Facts . . ." Return to text.USSBA
, "Facts . . ." Return to text.Friedman
, E.M. Return to text.Kentucky
Long-Term Policy Research Center, banker survey: (Q-1) We define "small business" as those having fewer than 20 employees and define entrepreneurs as individuals starting small businesses. Does your institution make loans to small businesses and entrepreneurs in Kentucky? The results show that 94.6 percent of the 93 banks that responded answered "Yes." Of the 5.4 percent of banks that responded "No" (5 banks), 20 percent (or 1 bank) indicated that the institution will be extending loans to small businesses and entrepreneurs in the foreseeable future. Return to text.Banker
survey (Q-2). Refer to Appendix B. Return to text.Of
the banks responding to the survey, 53 are located in rural counties and 26 in urban counties. The regional distribution is: West=15, South Central=21, East=14, and Urban Triangle=21. Return to text.Sheshunoff
, Banks of Kentucky, 1997, p. i-15. Return to text.Kentucky
Long-Term Policy Research Center analysis of Sheshunoff data. Return to text.According
to Sheshunoff, "Risk-wieghted capital ratios provide a measure of capital to assets based on the perceived risk to a bank of each type of asset. Generally, cash, cash equivalents, and U.S. government obligations require no capital; interbank claims and U.S. agency and municipal obligations have a 20 percent risk weighting; residential real estate loans and municipal revenue bonds are risk weighted at 50 percent; and all other assets are risk weighted at 100 percent." The general rule is that the higher the ratio, the more conservative the mix of assets in the bank’s balance sheet. A value over 2 indicates a more conservative mix of investments while a value in the area of 1.7 to 2.0 suggests a less conservative mix of investments Return to text.We
should note, however, that many types of risk capital are needed by entrepreneurs, and these ratios gloss over these differences. Some have argued, for example, that many banks are far more reluctant to lend to knowledge-based firms. Return to text.USSBA
, Office of Advocacy. Return to text.R
.T. Mayer, R. Radosevich, E.C. Carayannis, M. David and J.G. Butler, The 1995 National Census of Early-Stage Capital Financing (Albuquerque: Orion Technical Associates, Inc., 1995) 54. Return to text.According
to the 1996 edition of Pratt’s Guide to Venture Capital Sources, only five venture capital firms are based in the state. A sixth newly formed firm, however, was not included on Pratt’s list. Return to text.Mayer
et al. Return to text."Venture
Capitalists: A Really Big Adventure," The Economist 25 Jan. 1997: 21. Return to text.Venture
Economics as cited by Goetz and Freshwater, 13. Return to text.Inc
., "The Inc 500: A Statistical Tour." Return to text."Venture
Capitalists…": 20-22. Return to text.Lawrence
M. Alleva, "Is There a Capital Gap in the South? Price Waterhouse Venture Capital Survey Observations," Presentation to Capitalizing Southern Growth Conference, Southern Growth Policies Board, 20-21 June 1996. Return to text.Venture
Economics as cited by Stephan J. Goetz and David Freshwater. Return to text.Price
Waterhouse, National Venture Capital Survey: Selected Findings for the Southern Growth Policies Board (Atlanta: Author, 1996). Return to text.The
construction of this survey was based on a 1990 survey and report, "Venture Capital Firms Within Reach of Kentucky Ideas," prepared by Thomas M. Bailey, now an economist with the Economic Development Cabinet. Return to text.According
to the USSBA, "The Small Business Investment Company Program (SBIC) was started in 1958 by Congress to provide venture capital to small businesses for start-up and growth-capital needs. The SBA licenses and regulates these privately owned and managed investment firms. SBICs provide equity capital, long-term loans and management assistance to qualified small businesses using their own capital and funds obtained at favorable rates through assistance from the SBA." Return to text.In
1990, Bailey identified 27 firms within easy reach of Kentucky entrepreneurs. Return to text.The
surveys were sent to 37 out-of-state firms. Of the 37 identified firms, 32 responded to the Center survey. Return to text.This
is the capital under management by those firms that indicated a willingness to lend to Kentucky-based businesses. We could not identify the amount of capital under management for several of the firms, so the $675 million is a conservative estimate. Return to text.MACED
, Promoting Entrepreneurship 9. Return to text.Banker
survey (Q-18). See Appendix B. Return to text.Banker
survey (Q-21): What do you see as the biggest obstacle in making loans to Kentucky’s small businesses and entrepreneurs? Return to text.Survey
of Small Business Owners (Q-9): Do you have a written business plan for this business? There were 470 respondents to this question (60.6 percent responded with NO and 39.4 percent said YES). Return to text.Survey
of Small Business Owners (Q-19): In retrospect, do you believe the process of acquiring financing for this business was overly difficult or appropriately demanding? There were 360 responses to the question, with 68.6 percent saying "appropriately demanding" and 31.4 percent saying "overly difficult." Return to text.The
difficulty of acquiring financing can be modeled as a dichotomous dependent variable. Accordingly, we use a probit specification to estimate the parameter values for each of the variables listed in Figure 1. This allows us to identify the impact of each of the factors on the likelihood the entrepreneur would have had answered "overly difficult," or P(Yi=1), while holding all other variables constant. This maximum likelihood model predicts that, on average, there is a .271 probability an entrepreneur would characterize the process as "overly difficult" (remember that the sample value is .314). The parameter estimates, standard errors and significance levels are listed in Table F.2 in Appendix F. (Note: If the business is located in a rural area, then dummy variable RURALBIZ=1. If the entrepreneur acquired a SBA guaranteed loan, then dummy variable SBALOAN=1. If the loan was obtained from a community bank, then dummy variable COMBANK=1. The amount of the loan, or LG10LOAN, was transformed, because of outliers, to its base-10 logarithm. The dummy variable BIZPLAN=1 if the entrepreneur had a written business plan. The dummy variable FIRSTBIZ=1 if it was the entrepreneurs first business start-up, and GENDER=1 if the entrepreneur is a male.) Return to text.J
. Weber and S. Woolley, "The Next Feeding Frenzy Will Feature Smaller Fish," Business Week 11 Sept. 1995: 38-39. Return to text.One
of the key reasons for the trend toward bank consolidation was the deregulation of capital markets and the impact it had on capital formation in economic development. In the early 1980s, deregulation of the financial services industry at both the federal and state levels encouraged the consolidation of banking interests across the country. Federal regulations were changed in the early 1980s to allow interstate bank acquisitions. Many states followed suit, passing legislation allowing out-of-state banking institutions to acquire local banks. Return to text.Kentucky
has consistently averaged about 2.7 percent of the total number of banks across the country. The U.S. Small Business Administration estimates the total number of banks in the year 2005 at around 7,000. If Kentucky continues to account for 2.7 percent of that 7,000 there will be fewer than 200 banks in the state. Return to text.T
. Bode, "Consolidations Substantial Over Past Five Years," Kentucky Journal June/July 1996: 2-3. Return to text.Angie
Hatton, "State’s Largest Banks Are Out-of-State Institutions," The Kentucky Gazette 9 July 1996: 1. Return to text.The
Small Business Administration defines small business loans as those less than $250,000. Return to text.Nicholas
Walraven, "Small Business Lending by Banks Involved in Mergers," Board of Governors of the Federal Reserve System. Return to text.J
. Peek and E.S. Rosengren, "Bank Consolidation and Small Business Lending: It’s Not Just Bank Size That Matters," NYU Stern School of Business. Return to text.Walraven
. Return to text.Rural
Policy Research Institute Rural Finance Task Force, The Adequacy of Rural Financial Markets: Rural Economic Development Impacts of Seven Key Policy Issues (Columbia: Rural Policy Research Institute [University of Missouri], 1997) 5. Return to text.Banker
survey (Q-3): There were approximately 300 banks in Kentucky in 1994. If current trends continue, there will be fewer than 200 banks in Kentucky by the year 2005—a loss of more than one-third of the state’s banks. Assuming this trend continues, do you think that continued bank consolidation will mean less capital for entrepreneurs, have no impact, or result in more capital? (Q-4): Has your institution gone through a consolidation in the last 10 years? Return to text.Sara
Oppenheim, "Bank Financing Up, Loans from Relatives Down," American Banker 10 Mar. 1997: 5. Return to text.Oppenheim
. Return to text.Survey
of Small Business Owners (Q-36): Based on your knowledge and experience, how would you rate the following factors which affect the ability of entrepreneurs to launch and grow small businesses in Kentucky? Are they good, fair or poor? Return to text.Jim
Jordan, "Small Banks Are Taking Big Steps," Lexington Herald-Leader 26 Jan. 1998: B11. Return to text.Jordan
. Return to text.