Smaller Firms Less Likely To Use Credit
Jul 13th, 2010 | By Dawn Rivers Baker | Category: ResearchLast month, the SBA Office of Advocacy released a new research report entitled Bank Credit, Trade Credit or No Credit: Evidence from the Surveys of Small Business Finances, written by Rebel A. Cole with funding from Advocacy. Cole undertakes this research because there is almost nothing in the literature that examines small employer businesses that do not use any form of credit. Her research, which uses data from the Fed’s Survey of Small Business Finances, found that one-fifth of small firms use no credit at all, one-fifth use only trade credit, one-fifth use only bank credit, and two-fifths of them use both bank and trade credit.
Upon closer examination, Cole found that firms that use no credit at all tend to be “significantly smaller,” more profitable and more liquid, with better credit quality but fewer tangible assets. Even more interesting, such firms were presumed to indulge in what behavior finance calls irrational behavior: the failure to take advantage of opportunities to leverage up their return on equity. This sort of tacit admonishment is typical of those who can’t comprehend microbusiness owners, who don’t usually think like investors and so often make decisions for reasons other than a desire to increase the value of their business.
