1024 Capital Center Drive, Suite 310, Frankfort, Kentucky 40601-8204
Telephone: 502-573-2851 or 800-853-2851 Fax: 502-573-1412 or 800-383-1412
http://www.lrc.state.ky.us/ltprc/home.htm
1024 Capital Center Drive, Suite 310, Frankfort, Kentucky 40601-8204
Telephone: 502-573-2851 or 800-853-2851 Fax: 502-573-1412 or 800-383-1412
http://www.lrc.state.ky.us/ltprc/home.htm
CONTACT: Michael T. Childress or Michal Smith-Mello
FRANKFORT, KY (February 24, 1998) -- Contrary to widely held assumptions, qualified Kentucky entrepreneurs and small business owners have access to abundant capital. However, the "deal flow," the sheer volume of entrepreneurial ventures, is in short supply in Kentucky, say traditional and nontraditional lenders. Entrepreneurs and small business owners need more information about available capital and more support, training and guidance rather than new sources of capital, the Center concludes.
The Center's findings about small business financing are part of a larger, forthcoming study of entrepreneurship that includes results from surveys of small business owners and bankers in Kentucky, venture capital firms in surrounding states, and business owners with sites on the World Wide Web.
These survey findings suggest that an underdeveloped entrepreneurial culture, a shortage of management talent and business experience, and an inadequate public response to these needs may be muting the very entrepreneurial energy that many researchers believe is driving the nation's economy. When asked if the Commonwealth has a shortage of capital or a shortage of entrepreneurs, state bankers are generally of one mind: 68 percent say Kentucky needs more, better prepared entrepreneurs. More urban bankers (38 percent), however, perceive a shortage of capital as the problem than rural bankers (28 percent).
Indeed, small business owners give the state fairly high marks for capital availability and find the lending process appropriately rigorous. When asked to evaluate access to financing in Kentucky, 29 percent of small business owners rated it as "good," 45 percent rated it as "fair," and only 25 percent rated it as "poor." When asked to evaluate the process of securing financing to start their business, 69 percent of small business owners said it was "appropriately demanding" while only 31 percent said it was "overly difficult."
The Center also sought to learn more about the availability of higher-risk venture capital to Kentucky entrepreneurs. Assuming that Kentucky firms will lend to Kentucky entrepreneurs, the Center surveyed venture capital firms within a three-hour drive of the state's border to determine how closely these funds are linked to the region or "neighborhood" in which they are located. The findings suggest that, if the deal has sufficient merit, venture capital will travel, certainly the short distance in question here. Fully 85 percent of the venture capital firms and Small Business Investment Corporations surveyed say they are willing to loan to Kentucky-based businesses, but only 25 percent have loaned to Kentucky firms and only 19 percent now have Kentucky firms in their portfolios.
Kentucky's relative poverty is also a drain on entrepreneurial energy. Capital in the form of collateral is in particularly short supply, bankers say; 56 percent of survey respondents cited it as an obstacle to lending to entrepreneurs and small businesses. Another quarter of state bankers cited underdeveloped entrepreneurial skills as the biggest obstacles to small business loans, including "poor business plans" (15 percent) and "lack of business knowledge" (10 percent).
When asked to rate the importance of various factors that influence lending decisions, 92 percent of state bankers rated "strength of management" as "very important" while 77 percent rated "strength of business plan" and 69 percent rated "experience starting or running a business" as "very important." Venture capital firms, generally nontraditional lenders of higher risk capital, cited the same core needs for strong management teams and sound business plans as key to lending decisions.
While 35 percent of small business owners cited financing as the most significant obstacle to launching their business, second only to "government red tape," 44 percent reported having acquired capital to launch their businesses from banks. Only "personal savings, friends or family" were cited more often (58 percent) as a source of start-up capital, a finding that is compatible with national studies. The median amount of money small business owners reported needing to launch their firms was just under $40,000, but 13.8 percent of these entrepreneurs reported started their businesses with $5,000 or less and 22.7 percent got started with $10,000 or less.
A Center analysis of U.S. Small Business Administration data found that, in 1996, Kentucky banks made more loans under $100,000 per person than those in every other surrounding state. Further, the Center finds that the leverage ratios (core capital to tangible assets) for Kentucky banks are indicative of abundant capital. Moreover, the 32 venture capital firms who responded to the Center survey reported having more than $675 million under management.
Perhaps the only evidence of a shortage of capital that the Center found is in the area of loans to microenterprises, very small, often sole-proprietor firms. Because the return on microloans does not justify the cost of processing and many would-be microentrepreneurs have limited or poor credit histories, traditional lenders seldom make such loans. And few microenterprise funds in the state provide very small loans that could help low-income and poor Kentuckians launch tiny enterprises or prepare themselves for employment. In addition to the need for more microlending, more vehicles designed to enable asset accumulation could help encourage savings and investment and help remedy the shortage of collateral traditional lenders often encounter.
This survey of small business owners was mailed to 6,000 small businesses in Kentucky and had a response rate of 9 percent. The survey of bankers was mailed to 344 banks and had a response rate of 28 percent. The venture capital survey was mailed to 37 out-of-state firms, 32 of which responded for a response rate of 86 percent.
Copies of this excerpt and of the forthcoming report, Entrepreneurs and Small Business-Kentucky's Neglected Natural Resource, which is planned for release this Spring, may be obtained from the Kentucky Long-Term Policy Research Center.