More than 48 percent (142 replies out of 293 who stated reasons for unavailability of funds) said that the lack of acceptable security or collateral accounted for their failure to obtain the amount of funds required during the decade 1939 to 1949. The terms (maturity and interest rates) offered accounted for another 11 percent of failures. The amount offered by the lender was too small in nearly 7 percent of the cases. A study of table 22 strongly suggests that the reasons stated were largely concerned with the credit standing of those who sought more funds. In many cases the lenders probably did not regard them as acceptable credit risks. This would, of course, help to explain why the terms (amounts, maturity, and rates) were considered so rigid by those seeking additional funds. Obstacles to small-business financing In table 22 is presented a summary of the reasons given by those members who had failed to obtain additional funds during 1939 to 1949. A summary of the obstacles given by a large number of members—both those who failed to obtain funds and those who did not actually need additional funds, is presented in table 23. 85072-51- -16 TABLE 23.-Obstacles to obtaining funds by small business-Opinions of respondents The obstacles or difficulties encountered by small business in obtaining funds vary considerably by types of funds needed. (See chart XIV.) The most significant obstacles to commercial loans are found in the character and amount of the current assets (short-term debt and/or inventories), the lack of capital (equity) funds and the future uncertainty of business. These factors account for 71 percent of difficulties involved in raising short-term funds. By adding 10 percent for new companies the percentage would be increased to 81. In case of term loans, the reasons vary considerably but still show a great similarity to difficulties involved in raising commercial funds. Large short-term debt, inadequate capital, business uncertainty and new company account for 69 percent of the difficulties in connection with term loans and adding large inventories, the total is 78 percent. Failure to obtain bond and mortgage money is said to be due to inadequate capital (24 percent), business uncertainty (22 percent), new company (12 percent), and the unwillingness of borrower to meet terms (9 percent). Here, as it would be expected, more emphasis is placed on permanent assets and future business developments and less on the current position. With regard to raising capital funds through the sale of common and preferred stock, the two main obstacles encountered were business uncertainty, and the fact that many of those who might go to the security markets are either new or small concerns which cannot obtain funds from that source. These conditions. apply either to the sale of common or preferred stock. There is essentially no difference in the suggested obstacles to be overcome in the sale and distribution of common and preferred shares. The difficulties of raising funds through the sale of bonds or mortgages correspond more nearly to those encountered in the sale of stock than to those involved in the raising of funds through commercial loans. The risk is great not only with regard to new business, but also with regard to many small, old firms. Aside from the risk there is the fact that such securities are generally unmarketable, such investments would become "illiquid" or "frozen" once they had been made. The number of failures or discontinuances are relatively high in the case of small firms-both old and new. Are methods of financing small business changing basically? A fairly substantial group of businessmen hold that business practices have been changing so rapidly and fundamentally in recent years that new methods of financing are required to meet new developments. Another argument that has been advanced, is that commercial banks have not provided sufficient funds to meet the essential needs of small business, consequently new institutions should be established to finance properly business under these new conditions. This general attitude is further emphasized by the recent demands that government either guarantee the loans of small business enterprises or advance funds to them directly. Provisions for guaranteeing loans were embodied in the sections smallbusiness bill of 1950 which provided for the creation of national investment companies. Chart XIV. OBSTACLES TO OBTAINING FUNDS BY SMALL BUSINESS The question was raised, "Have there been any basic changes in methods of financing small business concerns in your industry (not in your business) since 1939?" A total of 2,577 replies was received of which only 369 or 14 percent expressed the belief that there had been any basic changes in their industry. On the other hand, 2,208 or 86 percent reported that no basic changes had occurred.30 It was the general opinion of these respondents, who said changes had occurred, that the changes had resulted from various factors. Heavy taxes, Government loans, and Government interference were held responsible by 169 or 37 percent of those who gave their reasons for such changes. Almost 13 percent replied that the more liberal lending power of banks was an important factor. Lack of risk capital was another factor accounting for almost 10 percent. Other reasons mentioned were monopoly, labor troubles, harder times, etc. More details regarding reasons advanced by those who believed that basic changes had taken place are given in table 24. Regardless of the reasons advanced, it must be remembered that these opinions represented only 14 percent of the members of the association who answered this question. 30 In some cases the respondents listed more than one factor. This accounts for the fact that there are 457 "cases" given in Table 24. TABLE 24.-Have basic changes in financing small business taken place in recent years-Opinions of respondents 1 This question was answered by 2,577 members. Only 369 or 14 percent believed that basic changes had taken place since 1939. These 369 gave, in some cases, more than one factor. 2 Contains duplication due to respondents who indicated more than one factor. VI. GOVERNMENT AND SMALL BUSINESS Government and growth of small business The American enterprise system has been developed over a long period of years in accordance with needs and desires of the public. This free competitive system has resulted in the production and distribution of vast quantities of goods and services. In recent years it has become necessary to invest larger and larger amounts of funds to enable an individual or small group to launch successfully a new business. The difficulties encountered by a considerable number of people have induced many to turn to the Government for financial aid and/or managerial advice. Legislative bodies, Government departments and agencies have made strong efforts to assist small business in solving these basic problems. Increasing competition, higher costs, and the uncertainty of business trends in the future tend to increase the burden on small business. The advocates of Government aid justify it on the basis that the future of the free enterprise system as well as that of the country depends upon the future growth and stability of small business. In view of this declared position, it should be no surprise to see many politicians striving publicly to help the smallbusiness man. The aid which has been extended to the farmers through subsidies, to the veterans through bonuses, to home owners through the FHA, etc., influenced many small-business men to look to the Government for help whenever serious financial or managerial difficulties arise. Adequate and efficient production of goods and services is highly essential. Regulation in public interest of certain aspects of free enterprise is fully recognized as an essential function of the Government. Government regulation should not be permitted to replace or lower the efficiency of private management but should seek to fix the rules and regulations of conduct so that the rights of all will be dealt with fairly. It must not be allowed to destroy individual initiative and competition. A healthy economy will mean more new products and the gradual improvement in the standard of living. Competition arising out of a free economy with broad markets is the best guaranty that the public welfare will continue to be served. Government aid Expert help and guidance can be given best by practical men who have been themselves thoroughly trained. The experts who offer such advice should be held responsible for their actions. It is very doubtful if the Government, in the first place, can attract the type of managerial ability that is needed. Government salaries and future opportunities are not sufficiently attractive to induce many men of high ability to enter and remain in public employment. In addition it is open to serious question as to whether civil-service men can be expected to assume the same responsibility that is expected from private consultants— engineers, lawyers, and accountants. The Government employee is not always subject to such rigid standards. The appointment may be political in nature |