The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle by Allen N. Berger and Gregory F. Udell

Synopsis

The article, The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle by Allen N. Berger and Gregory F. Udell, discuss the economics of small business financing in private and debt markets. The article shows the sources of small business finance and how it is done by size and age of the business. The authors of the article examine the impact of the macroeconomic environment on small businesses and show the connection to small business finance. It looks at different parts of small business finance and the investors. The authors point out that small business finance should be viewed through a growth cycle and that most small businesses do not fit into this cycle. The article also provides an analysis of research and policy issues. Finally, the article talks about the importance of private equity to small business finance and the role of private debt markets to small business finance.

Critique

I agree with the authors argument that the capital structure changes with the size and age of the firm. The analysis of the article shows that the three main sources of all small business finance consists of the principal owner, commercial banks and trade creditors. Credit cards are not used very often by small businesses as only 1% of small businesses use them. What was left out of the article was the research of the effects of the availability and cost of small business finance of the creation of new firms and how they change over the business cycle as information processing technology improves. This information is useful to me as a small business owner that if I want to get financing, it would have to come from mainly from myself, family, commercial banks or trade creditors. If I use the commercial bank, I would have to expect to use personal collateral.

Discussion Questions:

1. How do you think small business finance may change over the course of the business cycle?

2. What are the effects of the availability and cost of small business finance on the creation of new firms?

3. How do you think small business finance will change over the business cycle as information processing technology improve?