Filling the U.S. Small Business Funding Gap

Tuesday February 4, 2020
Investing

Despite having the deepest and most diverse capital markets in the world, the United States still struggles to provide sufficient capital to many small businesses outside of major commercial centers as well as to women-owned and minority-owned businesses regardless of size or location.

Introduction

Capital markets in the United States are the envy of the world. The highly liquid U.S. public stock and bond markets provide trillions of dollars of capital to U.S. and global businesses. The U.S. banking system is highly developed and efficient, even if regulations introduced after the financial crisis have resulted in a reduction of lending activity to the small business sector. Rapid development over the last three decades of other private capital markets including private equity (PE) buyout funds, venture capital (VC), and growth capital funds have resulted in these vehicles now regularly deploying more than $100 billion in new capital each year.

Undoubtedly, the U.S. has the largest variety of institutional funding mechanisms in the world, resulting in the ability to provide capital to businesses of any size in all industries and geographies. However, the ability to provide capital is not the same as actually providing it. As we discuss in detail below, research documents systematic differences in access to capital for certain types of businesses, especially those located outside of major cities and those owned by women and underrepresented minorities. This paper reviews the literature on funding gaps and provides a brief analysis of more recent data on Small Business Investment Companies (SBICs) and venture capital funds (VCs) to better understand how current funding vehicles may be effective in closing these funding gaps.

Our analysis shows that SBICs tend to provide more geographically dispersed funding and a higher percentage of funding to women-owned businesses. However, because SBICs are only a small part of the broader funding ecosystem, pronounced geographic and demographic differences in funding remain. This suggests the need to further scale the SBIC program in order to make more funds available to fill small business funding gaps.