Small business and their relationship with financial organizations.

1. Small Business
Research
1 0 / 1 6 / 2 0 1 2
Sundeep Mohanty
This document is to capture small business behaviors,
concerns, issues, impact on USA economy and what
opportunities these small businesses bring for financial
institutes.

2. Page 1 of 16
Table of Contents
Introduction ..................................................................................................................................................2
Major Challenges for Small Business ............................................................................................................3
i. Access to Capital ...............................................................................................................................3
ii. Dealing with regulation.....................................................................................................................3
iii. Affording Marketing..........................................................................................................................3
iv. Transitioning from self-funded to funded ........................................................................................3
v. Finding and retaining right resources...............................................................................................3
vi. Finding ways to grow ........................................................................................................................3
vii. Getting paid in time and getting fair price....................................................................................4
viii. Money Management ....................................................................................................................4
ix. Economic uncertainty and weak sales..............................................................................................4
x. Bargaining power and competing against big national and multinationals firms............................4
xi. Need of one stop operational need fulfillment ................................................................................4
xii. Business sustainability plan ..........................................................................................................4
Stakeholder Analysis.....................................................................................................................................5
A. Government and Small Business Administration (SBA)....................................................................5
SBA Loan Categories .............................................................................................................................6
B. Small Businesses Owners..................................................................................................................6
a. Women Owners ............................................................................................................................6
b. African American Owners .............................................................................................................6
c. Minority Owners...........................................................................................................................7
d. Veteran Owners............................................................................................................................9
C. Banks...............................................................................................................................................10
D. Credit Unions ..................................................................................................................................12
E. Angel investors and other financial institutes ................................................................................13
Other Facts:.................................................................................................................................................13
References ..................................................................................................................................................15

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Small Businesses and Credit Unions
Introduction:
There are 28 million small businesses in USA and in an average contribute 30% economic activities per
state. Out of 28 million small businesses 70% of small businesses owned and operated by single person
and at the same time small business employ 57% of USA private workforce which is almost 77 million of
USA workforce and it contributes to 44% of USA payroll.
The small businesses which are in the coastline states like, California, Texas, Florida, Virginia, New York
creates more cash flow and generates more job opportunities then small businesses in other states
whereas Northwestern states like Montana and Wyoming relay more heavily on small businesses.
But for the small businesses the biggest challenge is getting financed, getting help in financial issues,
consultation how to grow their business, and challenge of competing in crowded marked alongside big
USA businesses and global competitors. Banks and other big financial institutions don’t want to extend
their supportive hands to because of their relationship with big corporates and credit unions still finding
it are difficult to understand and trust these small businesses. It means till now in most cases small
businesses are doing their business alone with little or low support from banks and other financial
institute.
Government lately understood the importance of small businesses and trying to help small businesses
through “Small Business Administration” (SBA) program. But this Government initiative is not enough to
support and fulfill all the need of the small businesses and help them sustain and grow. Still there are

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big gaps between small businesses and financial industries that create opportunities for the credit
unions to come closer to small businesses and making them loyal to them.
Major Challenges for Small Business:
i. Access to Capital:
One of the biggest challenges for small business is getting access to fund/capital. Small
businesses often find it difficult to build trust with financing institutions. 49% small business
funded by credit cards and ends up paying high interest rate. As they lag in getting long term
financing and liquidity it reduced their ability to plan for improvement and growth.
ii. Dealing with regulation:
Dealing with regulation is also one of the major challenges for the small businesses. Most of
the time small businesses where not aware of what are the benefits available to them,
whom to approach for financing, understanding different state and federal law in
conducting business. One of the key reasons for small businesses to spend less time in
understanding the regulation might be working under limited budget and lack of resources
to consult.
iii. Affording Marketing:
Most of the small businesses lag in effective marketing. Most of the small businesses works
in tight budget don’t have enough budget for marketing spending, small businesses most of
the time works with other big businesses and find it is difficult to create their own brans
value. Most of the time small businesses go unnoticed and this is one of the main reasons
for small businesses to expand their business and create trust in market.
iv. Transitioning from self-funded to funded:
As most of time small business start their business using their credit card or other personal
source of funding, going forward they find it very challenging to move from self-funding
using credit card or other personal funding source to work on getting short term and long
term financing.
v. Finding and retaining right resources:
Finding and retaining right resources is a big challenge for small businesses. In an average
small businesses pay less in salary and lacks in providing attractive benefits compares to
multinational organizations. According to study, 61% small businesses considers it is very
challenging and difficult in getting right resources, it makes the business owner very limited
and overall lack of right recourses impacts businesses ability to grow.
vi. Finding ways to grow:
Because of their limited financial and human resources, Small businesses spend less in
research and new development activities. Small businesses lag in market analysis and as
most of the small businesses works for other big businesses, they devote themselves is
meeting the demand of other businesses with whom the small business does business and
lags in improvement and grow.

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vii. Getting paid in time and getting fair price:
As most of time small businesses works in conjunction with bigger businesses and mostly
depends on one or two vendors and partners, they always stay on receiving end. Small
businesses easy agrees to big business, most of the time it becomes challenging for small
businesses to get paid in time and getting fair price of their products and solutions.
viii. Money Management:
As most of the time small businesses are owner dependent and need owners involvement
or owners decision in operating business, most of the time the business operation keeps the
business owner busy and involved. Giving priority to business, the small business owner
spend less time to utilize the money in better way and hence it limited the small businesses
to grow their business and to utilize money to work for them.
ix. Economic uncertainty and weak sales:
This is one of the other key reasons which hurt small businesses the most. With uncertainty
in market and with low demand, small businesses come under high pressure to provide
more service and solutions in reduced price. With cost remains the same, profit margin
reduces and without changing the business model and bringing innovative approach in
selling products and solutions, it is very difficult for small businesses to stay longer in
market.
x. Bargaining power and competing against big national and
multinationals firms:
Most of small businesses struggle to maintain profit margin while competing against big
firms. Big firms with their big structure and volume of transaction enjoys great bargaining
power to purchase equipment’s and or raw materials, whereas small businesses with local
presence don’t have much options and often end of in higher side on production or
manufacturing cost.
xi. Need of one stop operational need fulfillment:
One of the major challenges for small business is there is no single entity which can fulfill
most of their operational need. That means, small businesses are working with multiple
vendors to meet their daily operational need and which demands more time from the
business owner and sometimes create hassle in managing all different vendors.
xii. Business sustainability plan:
This is one of the key issues for small businesses. Small business lacks in planning and
creating long term plan. Most of time small business stay occupied by their current business
operation that they find very less time and make very small effort in creating business
sustainability plan. Also small businesses stay less prepared for market demand change and
change in market expectation. As per the market study conducted by Bolt organization, 80%
small businesses that do not recover from a disaster are likely to go out of business within 1
month. 51% small businesses find it hard to compete in market and close down their
business or start some other business within 2 years of starting the business. 75% small
businesses without business continuity plan fail within 3 years of disaster and 43% of
businesses never reopened after 5 years of business.

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[Source: Bolt] [Source: Equifax]
[Source: Equifax]
Stakeholder Analysis:
A. Government and Small Business Administration (SBA):
SBA is the initiative by federal government to protect the interest of small businesses and small business
owners to help them establishing the business and create environment for small business to grow and
compete. Government realized the essential of small market for USA economy and free from
monopolist market. By creating small business act and establishing small business administration, the
federal government with the help of department of commerce and other relevant State and Federal
agencies trying to aid and assist small businesses. Through SBA, federal government’s main purpose is to
support small business in the following areas:

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i. Enhancing their ability to export
ii. Facilitating technology transfers
iii. Enhancing their ability to compete effectively and efficiently against imports
iv. Proving small businesses access to long term capital.
v. Disseminating information concerning State, Federal, and private programs and initiatives to
enhance the ability of small businesses to compete in international market.
vi. Ensuring that the interests of small businesses are adequately represented in bilateral and
multilateral trade negotiations.
So to serve small businesses SBA lends various different types of loans and aids to small businesses
through partnered banks and financial institutions. SBA loans are small business loans given out by
certain approved banks backed by the Small Business Administration (SBA). Some of the popular SBA
loan programs are mentioned below.
SBA Loan Categories:
i. SBA 7(a) Loan Program
a. 7(a) Express Loan Programs
b. 7(a) Export Loan Program
c. 7(a) Rural Lender Advantage Program
d. 7(a) Special Purpose Loan Program
ii. SBA 504 Loan Program
iii. SBA Micro Loan Program
B. Small Businesses Owners:
a. Women Owners:
As per Government study, in 2007 there are 7.8 million firms owned by women, which is
30% of all non-farms, privately owned US firms. $1.2 trillion dollars of transactions
(sales/receipts) has done by these women own firms, which is 11% of USA total market
transactions. By last conducted survey in 2007, women owned firms paid salary to 7.6
million workers, which is 13% employment among privately held companies. Between
1997 and 2007 women owned business grew 44% twice as fast as men owned
businesses. Though women own businesses are growing substantially, there are still
work needs to be done to reduce discrimination against women and help and support
women owned businesses to create free and friendly market where women can play
equal role as others in contributing to the USA economy and the same time get equal
opportunity to compete and do business.
b. African American Owners:
As per latest government report, in 2007 there were 1,921,881 (above 1.9 million) small
businesses which is 60.5% up since 2000. Out of all black owned businesses 1.8 million
had no paid employee which is 94% of total black-owned firms. Most of the Black
owners prefer health care and social assistance related small businesses. 19% of total
health care related businesses in USA owned by black owners and 15.4% of total social

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assistance related businesses in USA owned by black owners. As per government census
report in 2007 with 204,032 New York had the largest numbers black-owned firms
which is 10.6% of all black-owned firms, it contributes to $12.8 billion of transaction
sale/receipts, which is 9.3% of all black-owned firm receipts. Georgia and Florida were
next with 183,874 (9.6 percent) and 181,437 (9.4 percent) black-owned firms
respectively, with receipts of $8.9 billion (6.5 percent) and 10.6 billion (7.7 percent)
respectively.
c. Minority Owners:
Minority-owned businesses were largely concentrated in California, Texas, Florida and
New York, representing 55 percent of all minority-owned businesses in the United
States. Texas and Florida gained a larger concentration of minority-owned businesses,
from 12% in 2002 to 13% in 2007, and from 10% in 2002 to 12% in 2007, respectively.
Almost 4-in-10 minority owned firms could be found in the following metro areas:
i. Los Angeles-Long Beach, California
ii. New York, N.Y.
iii. Miami, Florida
iv. Washington, D.C
v. Maryland, Virginia, West Virginia.
vi. Chicago, Illinois
vii. Houston, Texas
viii. Orange County, California
ix. Atlanta, Georgia

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x. Riverside-San Bernardino and San Francisco, California
Please click on the attached PDF file to see minority small business activity in some of
the major USA cities:
SMOBE_1997_Cities.
pdf
Minority-owned businesses grew more than four times as fast as U.S. firms overall
between 1992 and 1997, increasing from 2.1 million to about 2.8 million firms. The 30
percent growth rate exceeded the 7 percent increase for all U.S. firms, which jumped
from 17.3 million in 1992 to 18.4 million in 1997. Receipts of all minority-owned firms
(excluding C corporations) rose 60% to $335.3 billion in 1997, compared with a 40
percent increase for all U.S. firms over the same period. Addition to minorities, In New
York City, immigrants make up 46% of the incorporated self-employed overall
Immigrants make up 12.5% of small business owners nationwide.

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Below provided all the relevant PDF file
The_State_of_Minori
ty_Business.pdf
The_State_of_Asian
_Business.pdf
The_State_of_Hispa
nic_Business.pdf
The_State_of_Africa
n_American_Business.pdf
The_State_of_Nativ
e_Hawaiian_and_Other_Pacific_Islander_Profile.pdf
The_State_of_Asian
_Business_by_Gender.pdf
TheStateofHispanicB
usinessbyGender.pdf
The_State_of_Africa
n_American_Business_by_Gender.pdf
TheStateofNHOPIBu
sinessbyGender.pdf
United States by
Industry.pdf
d. Veteran Owners:
As per data from SBA, there were 2.45 million businesses with majority ownership by
veterans, which represents 9% of all USA small business firms. Veterans owned small
businesses employed 5.793 million employees and contributes to annual $210 billion of

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payroll payments. The 491,000 veteran-owned employers made up 20.1 percent of all
veteran owned firms, similar to the share of employers among all firms, 21.2 percent.
Veteran-owned employers had sales/receipts of $1.126 trillion, 92.3 percent of the
sales/receipts of all veteran-owned firms (with and without employees). One-third of all
veteran-owned firms were found in two industries: 16.9% in the professional, scientific,
and technical services group, and 15.5% in construction. 9.9% shares of veteran owned
firms were also found in other services, 8.9% in real estate and 8.1% in retail trade.
Major states of veteran own businesses are California, Texas, Florida, New York and
Georgia in the order it is mentioned here. South Carolina had the largest percentage at
12.9%, followed by West Virginia at 12.6 %, Virginia at 12.4 %, Tennessee at 11.9%, and
Alabama at 11.8%.
As per Govt. census data, in 2007, 55.4 % of veteran-owned respondent businesses
reported that they were home-based, compared with 51.6 % of all respondent firms.
61.7% of veteran owned firms funded by personal or family saving. Business loans from
banks or other commercial lenders were the second most important source at 9.8
percent for veteran owned firms. 75.1% of veteran business owners were age 55 and
over, with 36.1% age 65 or older, compared with 36.6%and 12.5% of all business
owners, respectively.
C. Banks:
Like small businesses, banks are also one of the key components of USA economy. All major USA
banks have more lending capacity then credit unions, small community banks and other
financial institutions. For small businesses banks are second major source of funding, second to
personal and family funding. Most of the major banks partners with federal governments SBA
program to lend to small businesses which are supported by SBA small business act. Some of the
banks lend money to small businesses outside of government supported SBA loan, but the
percentage of such direct loan is very less. Most of the banks closely work with big national and
multinational established firms and are not much interested in lending money to small
businesses or entrepreneurs. Now in the current macro-economic situations, when banks want
to be more cautious in lending money and in addition, government wants banks to maintain
“excess reserve” by keeping the “safe reserve” money with federal government and in return
government is paying .25% interest on the deposit, for banks small businesses have less priority,
which means for small businesses, it is more difficult to get funded for the business and
continue growing the business or compete with big firms in the current market.

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In the recent time, under government pressure, banks increased their lending standards which
means less and less small business owner qualify for loan. According to Barlow research 28%
small businesses tapped equity in their homes to finance their businesses during the peak of
housing boom and it means, current effort by government and banks to fix bad mortgage
practices is also hitting small business. The number of bank loans to small businesses dropped
68% between 2007 and 2010, and the dollar value of the loans declined 55% in inflation-
adjusted terms. From 2009 to 2010, bank loans to small businesses fell by 32%, and the dollar
value of the loans declined 11% in inflation-adjusted terms.

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D. Credit Unions:
As per the past history, credit unions often considered as conservative in their business model,
and when it comes to lending to small businesses, credit unions are not very open in lending and
making relationship with small businesses. In past, government also not showed much interest
in bringing small businesses close to the credit unions. Very few credit unions participates in
government sponsored SBA lending program, in early 2000, federal government decided not to
allow credit unions in participating in SBA lending program, though from February-2002 federal
government again allowed the credit unions to participate in SBA lending program, still there are
very few credit unions participating in the SBA lending program. The other main reason for
credit unions to stay away from lending to small business is the low lending cap or MBL federal
government imposed on credit unions to lend money, till date the lending capacity or MBL of
credit unions is 12.25% of total their total asset. Lately things are changing for credit unions,
when banks are going away from small businesses it creates enormous opportunity for credit
unions to bridge long term relationship with small businesses. In recent day’s credit unions
looking for more opportunities to serve the small businesses, credit union putting continuous
effort to pressurize government to increase lending cap for credit unions. Senate Majority
Leader Harry Reid (D-Nev.) introduced the bill as part of S.509 JOBS bill in April-2012 in the
senate to increase the MBL cap from 12.25% of total asset to 27.5% of total asset of credit
unions failed in senate. However, the credit union small business job bill by chief sponsor, Sen.
Mark Udall (D-Colo.) S. 2231 to increase MBL cap up to 27.5% of total asset is still on hold with
heavy lobbying and pressure from major banks against the bill. If passed it will enable $13 billion
to small businesses and in the first year of its approval it has the potential to create up to
140,000 new jobs without adding any extra burden on taxpayers. Although the bill is still
pending in senate, recently in August 2012, Government designated more than 1000 credit
unions as “low-income credit union” which is addition to previous designated 1100 credit
unions. Though it is a loophole in regulation to impose lending cap, with this designation these
2100 (apx.) credit unions are eligible to lend up to 40% of their total asset.
In summary, it is the right time for credit unions to reach to more than 28 million small
businesses and which contributes to 44% of US payroll.

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E. Angel investors and other financial institutes:
Currently as banks are tighten their lending to small businesses and credit unions are not very
close to small businesses, angel investors are taking advantage of the situation. Angel investor’s
offers high interest loan to small businesses and often forces small businesses to sell the
businesses within 2 to 3 years of its operation and often angel investors detects the small
businesses on the way of operation and growth plan.
Other Facts:
i. Though Michigan is one of the major state which got big blow in past 3 years
economic situation, still Credit unions which are operating from Michigan are taking
bold steps by lending more business loans. As per the report released by Michigan
Credit Union League & Affiliates on Sep-5-2012, 46% of 309 Michigan credit unions
offers business loan. In the past 12 months in Michigan MBL increased 13.6%
whereas the national average is 8.2%.
ii. In USA small businesses, produce over $6 trillion in GDB each year which itself is
third highest economy after total USA economy and China’s economy.
iii. Though credit unions are lobbying for MBL cap increase, but the fact is most of the
credit union do not lend and 12.5% lending limit on total asset still a big margin for
credit unions which they yet to cross. In addition, if tomorrow MBL cap increased, it
will take two to three years for majority of credit unions to position themselves for
bigger loans or more loans.
iv. The bipartisan Small Business Lending Fund provided more than $4 billion to 332
community banks and community development loan funds to lend the money to
small businesses.
v. In 2011 SBA lend more than $30 billion through banks and other financial institutes.
vi. From 2009 to first quarter of 2012, small business failure rate reduced in compared
to small business birth/opening small business.
1999-2000 2004-2005 2007-2008 2008-2009
Births 574,300 644,122 597,074 518,500
Deaths 542,831 565,745 641,400 680,716
*Figures are March to March. Source: U.S. Census Bureau, SUSB.
vii. Small Business Shares (as per SBA statistics released on Sep-20-2012):
Table 1: Small Business Shares
Kind of Business Share (percent)
Home-based
business
52.0
Franchise 2.0
Sole proprietor 73.2

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Corporation 19.5
Employer business 21.5
Nonemployer
(business without
employees)
78.5
Source: U.S. Census Bureau, SBO, SUSB.
viii. Summary of small business owner demographic, number of firms own by them and
receipts per firm (as per 2007 census report):
Business
Owner
Demographic
Firms
(millions)
Receipts per
firm
($1,000)
All
businesses
27.1 1,070
Male 13.9 570
Female 7.8 130
Equally
male/
female
4.6 240
African-
American
1.9 50
Asian 1.6 290
Hispanic 2.3 120
Native
American/
Pacific
Islander
0.3 120
Veteran 3.7 450
Publicly
held
0.8 23,860
Source: U.S. Census Bureau, SBO.
ix. Small businesses produced 16 times more patents per employee than large patenting
firms did. Research also shows that increasing the number of employees correlates with
increased innovation while increasing sales does not.
x. 98% small businesses are exporting goods where as 33% are exporting values.

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References:
http://research.stlouisfed.org/fred2/series/EXCRESNS
http://smallbiztrends.com/2012/05/small-business-loans-and-small-loans-to-business.html
http://www.icba.org/files/ICBASites/PDFs/Aggressive%20Credit%20Unions%20Find%20New%20Loopho
le%20in%20Lending%20Limit%20-%20Bank%20Think%20Article%20-%20American%20Banker.pdf
http://www.sba.gov/content/small-business-size-regulations
http://www.usitc.gov/publications/332/pub4189.pdf
http://www.sba.gov/sites/default/files/files/Small%20Business%20Act.pdf
http://www.census.gov/econ/smallbus.html
http://www.smallbusinessloans.com/sba-loans/
http://www.sba.gov/sites/default/files/SBA%207a%20and%20504%20Gross%20Loan%20Approval%20V
olume%20as%20of%20012712.pdf
http://www.equifax.com/commercialsolutions/EF1057DataPrimer7-27-11.pdf
http://www.mbda.gov/taxonomy/term/60
http://articles.businessinsider.com/2012-03-12/news/31146859_1_financial-crisis-banks-lending-money
http://www.nytimes.com/2012/08/02/business/smallbusiness/for-small-businesses-bank-loan-
alternatives.html?_r=0
http://smallbiztrends.com/2012/05/small-business-loans-and-small-loans-to-business.html
http://www.american.com/archive/2012/may/why-arent-banks-lending-to-small-business-ask-
bernanke
http://www.sba.gov/sites/default/files/SBE_2011_2.pdf
http://www.cutimes.com/2012/09/14/sba-seeks-to-revise-size-definitions-for-certain-s
http://www.cumanagement.org/article/view/id/5177
http://www.cutimes.com/2011/09/25/sba-cus-pick-up-lending-slack
http://www.cutimes.com/2012/04/01/mbl-cap-legislation-heading-into-april-showdown
http://www.esa.doc.gov/sites/default/files/reports/documents/women-owned-businesses.pdf

17. Page 16 of 16
http://www.businessinsider.com/facts-about-small-businesses-in-america-2011-8?op=1
http://www.businessnewsdaily.com/1715-ten-business-challenges.html
http://www.investopedia.com/articles/pf/12/small-business-challenges.asp#axzz28f54nk9x
http://www.huffingtonpost.com/2012/01/24/small-business-outlook-biggest-
challenges_n_1190783.html
http://stream.wsj.com/story/markets/SS-2-5/SS-2-44320/
http://www.icba.org/files/ICBASites/PDFs/Aggressive%20Credit%20Unions%20Find%20New%20Loopho
le%20in%20Lending%20Limit%20-%20Bank%20Think%20Article%20-%20American%20Banker.pdf
http://www.usitc.gov/publications/332/pub4189.pdf
http://www.ustr.gov/trade-topics/small-business
http://www.sba.gov/content/small-business-size-regulations
http://66.29.200.20/rochdale/Upload/Member%20Business%20Lending%20Independent%20Reviews%
20White%20Paper.pdf
http://www.cuna.org/initiatives/mbl_estimates_statelist.html
http://www.sba.gov/sites/default/files/FINAL%20FAQ%202012%20Sept%202012%20web.pdf
http://www.washingtonpost.com/business/capitalbusiness/lifting-lending-cap-on-credit-unions-would-
hurt-community-banks/2012/05/04/gIQA3K3J6T_story.html