Bank lending important to small business

Much more important than expected in terms of financing small business. The total credit freeze when the financial crisis hit hurt everyone, but the ongoing credit crunch on small businesses and entrepreneurs may be a fairly big piece of the slow economic recovery puzzle.

From the link:

Small businesses are more sensitive to the contraction of bank lending than previously thought, and the conventional wisdom about how small businesses finance themselves may be hogwash, according to a new working paper from the National Bureau of Economic Research.

The paper, “The Capital Structure Decisions of New Firms,” found that newly created firms rely heavily on “outside” debt financing, such as owner-backed loans, business bank loans, and business credit lines. The average amount of bank financing is seven times greater than the average amount of
“insider”-financed debt — money from family members and personal networks of the owner. Those groups were previously thought to be the primary providers of fuel for start-ups.