Sources of funds 30 In view of the widespread feeling that small business was unable to obtain the funds needed, it was thought desirable to supplement the existing information which we have briefly outlined, by concrete facts and the opinions of those industrialists currently engaged in manufacturing. Accordingly, the members of the association were requested to list the various sources from which, in their opinion, small business "should be able to obtain" commercial loans, term loans, funds through sale of bonds or mortgages, and the sale of stock. The replies received from the various respondents who answered the questionnaire are summarized in table 21 and chart XII. There are many more cases indicated than there were individual respondents because many respondents suggested two or more different sources for different types of funds. TABLE 21.-Sources from which small business should be able to obtain funds— opinions of respondents Commercial banks were clearly regarded by these responses as the most likely source for both commercial and term loans. Sixty-eight percent considered commercial banks as the primary source for commerical loans and 48 percent for term loans. Eleven and ten percent respectively regarded factoring companies and sales finance companies as sources for commercial loans. About 27 percent and 17 percent named insurance companies and Reconstruction Finance Corporation, respectively, as important sources for term loans. Insurance companies (50 percent), commercial banks (22 percent), and the Reconstruction Finance Corporation (18 percent) were named as the best outlets for the sale of bonds and mortgages. It is especially significant to know that such a large number of relatively small businessmen ranked the insurance companies so high as sources of bond and mortgage money. Investors other than the financial institutions were considered the main outlets for both common and preferred stock. This refers to the sale of stock through the market, direct to officers and directors, friends and relatives, or to local investors. Insurance companies were believed to be a reliable source for the sale of preferred stock by 17 percent of the respondents. Why many firms failed to obtain funds In view of the various current claims that there is a shortage of funds, one may justifiably raise these questions: "Why are 395 respondents now in need of additional funds?" Or, “Why were 225 small business enterprises not able to obtain the funds they needed during the past decade, 1939-49?" The reasons given by the "would-be borrower" are not necessarily, of course, the same as those offered by the lenders. The reason given for the period 1939-49 by the manufacturers who replied to this questionnaire have been summarized in table 22 and chart XIII. 30 This section summarizes the opinions of various members of the association who stated their views regarding the sources of funds. 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. |