Understanding Small Business Borrowing
While one of the first theories economics students encounter, developed by Modigliani and Miller nearly 50 years ago, deals with the theoretical optimal mix of debt and equity capital structure, the reality of funding a small business is another matter. Most small business owners constantly juggle income and expenses to meet payroll and purchase supplies and many tap loans or lines of credit when necessary. This real-world scenario prompted the Small Business Administration to study the financing structure of small privately held businesses and the findings hold clues for institutions hoping to sell financial instruments to harried small business owners. Here are the factors that positively correlate to the ratio of debt to assets when it comes to small business finance.
- Loans increase when the number of banks a business works with increases
- Loans increase when the number of financial institutions a business works with increases
- Male-owned businesses types carry higher loan balances than female-owned businesses
Share the complete analysis of small business borrowing trends with your financial services clients and use the data to develop new ways to sell financing.