Research released by Kauffman Firm Study (KFS), sponsored by the Ewing Marion Kauffman Foundation, tracked 5,000 new businesses founded in 2004 and found that:
- 89 percent of firms that were denied loans in 2009 felt that banks’ heightened requirements played a role in their denials;
- 21 percent of surveyed firms had chosen not to apply for loans for fear of being declined, and
- 5 percent refrained from seeking external equity financing for this reason.
The research also found that, “About half of the young firms surveyed made new investments in their businesses through debt financing in 2009, and less than one-quarter made new equity investments – an 8 percent decline in equity investing from 2008.”
Clearly, our bailout of the financial industry is not “trickling down” to the businesses that most need investment. Start-ups, the best generators of new jobs (with nearly all net job creation in America taking place at firms that are less than five years old), simply can’t access adequate capital to invest in the growth required to significantly reduce unemployment rates.
Ironically the amount of debt capital now available to LBO firms is once again at peak levels and the syndicated loan market (so-called junk bonds) are back in full swing, recapitalizing balance sheets of large firms. It would seem the drought does not extend to all corners of the business world. Another group at risk is in the small and lower middle market manufacturers and value-added producers who are in need of a succession strategy. Most of these firms are closely held, family owned businesses and many have owners who are increasingly older and who postponed the sale of their businesses when the market valuations declined in 2009. Absent a way to assist company management to acquire these businesses, owners will be left to sell to strategic buyers who will most likely simply close the business down and reduce the number of competitors in the space.
Why sell it to management only if one could sell it to the entire workforce and get a better price at the same time?
Why does this happen? Here is one example:
http://finance.fortune.cnn.com/2011/04/08/jamie-dimons-silly-housing-subsidy/
The critical part of financial reform, reinstituting the Glass-Steagall Act did not happen. Highly regulated commercial banks are necessary for debt financing of businesses. Venture capital is mostly interested in high, short-term growth companies which bring quick returns, but have no significant and lasting economic impact, least of all in creating plenty of jobs and good paying ones.
If the current types of investors and financiers existed in the XIXth century, the industrial revolution would have never taken place.
Solutions:
1. Alternative equity financing: crowd-, micro- financing.
2. Customers, whether individual or business, making buying decisions which take into account the economic impact on local communities and not primarily price.
3. Suppliers preferring to finance through favorable payment terms star-up and SME’s, not the big corporations.