Banker's Guide to New Small Business Finance: Venture Deals, Crowdfunding, Private Equity, and Technology, + Website

Chapter 1How Small Businesses Are Funded

“Small” business is the category still used to classify more than 99 percent of the 27 million business entities in the United States (although 75 percent of them have zero employees). Representing approximately 40 percent of all commercial sales, 50 percent of the U.S. gross domestic product, and over 55 percent of the nongovernment work force, small business is really big business.

This sector is credited for having created two out of every three new jobs in the United States for the past two decades, yet obtaining capital financing continues to be a challenge for most small business owners and entrepreneurs. And opposing logic, capital funding gets more challenging as the loan size decreases, rather than increases, at least as far as commercial banks are concerned.

DEFINING SMALL BUSINESS

Part of the ongoing confusion around small business financing is that there is no clear, absolute definition of the question, what is a small business? The federal government delegated the task of defining small business to the U.S. Small Business Administration (SBA) and they have stratified the response to make it necessary for anyone seeking an answer to that question to flip through a 46-page list of industrial codes to determine the agreed upon answer.

SBA defines small only according to the agency’s determination of business size relativity. And even that size relativity gets subdivided into different determinants used according to their classification. ...