Funding Growth for a Small Business
One thing that is great about a big business is that if it wants to capitalize on growth, then it has a vast array of options with which to do so. However, small businesses, which are the backbone of our country and economy, are not so lucky.
In fact instead of having a vast array of options to capitalize on growth, small businesses only have three primary resources: equity capital from the founder or founders and/or an outside investor or investors; a combination of operating cash flow and profits that are left in the business, like retained earnings; or borrowed funds that are typically acquired through a financial institution like a bank.
Due to the fact that the significant source of capital for a small business is borrowed money, you have to ask yourself, which of these options are you more likely to go with? Recent studies have found that around 13% of small businesses would rely on a large or national bank, 31% would use independent community banks and 22% would use a credit union. 34% of small businesses opted to not use a bank loan at all.
It is not surprising to see that over half of small businesses would prefer to use a local source of capital like an independent community bank or credit union. If you want the most consistent banking relationship, a locally owned institution is your best bet. This was easily seen by looking at the results of the financial crisis which happened in 2008-2009.
This brought to light one very unfortunate truth, that banks which are beholden to Wall Street analysts as well as the computer-generated credit score are not good companions to small business owners. It appears that many small businesses are just not ready to to trust a financial institution to fund growth.
However, any small business, despite its feelings on financial institutions, should have at least one banking relationship with an independent bank or credit union just to be on the safe side.
Source: Forbes – How Does a Small Business Fund Its Growth?