Small Business Economics (2006) 27: 157–168 Ó Springer 2006

DOI 10.1007/s11187-006-0009-8

Acquisition of Additional Equity Capital by
Small Firms – Findings from the National
Charles Ou
Survey of Small Business Finances George W. Haynes

ABSTRACT. While the importance of venture capital to the as the source of financing for these asset pur-
growth of small firms has been widely discussed during the past chases.1 It is, however, important to remember
decade, little is known about the acquisition of additional that the sources of the growth in the total value
equity capital, especially internal equity capital, by the majority
of small firms in the U.S. This paper utilizes the information
of a company’s net worth come from the initial
collected in the Federal Reserve Board’s 1993 and 1998 Small and subsequent equity investments by the own-
Business Finance Surveys to investigate the acquisition of er(s), business savings or retained earnings, as
additional equity capital by small firms. While the importance well as gains from market valuation in the assets
of public issue markets and venture capital investment in pro- when assets were valued at the appreciated
moting the growth of small dynamic firms cannot be denied, the
importance of external equity capital seems to be overstated. market prices. Therefore, it is difficult to esti-
Only a very small number of small firms acquired additional mate the importance of initial and subsequent
external equity capital. It is the internal equity capital, not equity investments in the total composition of
external, equity, that is one of the major financing sources for total equity held by the small business sector.
most small firms. We found that younger, lower quality firms A majority of firms utilize some type of debt
were more likely to acquire additional internal equity capital
than other firms. There appeared to be a ‘‘pecking order’’ of or equity capital. Debt capital includes loans
borrowing from internal sources to traditional lenders to non- provided by creditors. These creditors are clas-
traditional lenders. In addition, internal equity capital and debt sified as either traditional lenders, such as credit
acquired from traditional and non-traditional lenders appeared unions, thrifts, commercial banks, finance
to be complementary financial resources.
companies, brokerage firms and leasing com-
panies; or non-traditional lenders, such as fam-
1. Introduction ilies, other businesses, government and other
individuals. Equity capital includes capital in-
The phenomenal growth in the number of small vested in the firm without a specific repayment
business ventures over the past decade has in- date, where the supplier of the equity capital is
creased the demand for debt and equity capital effectively investing in the business. This study
by small business owners. It is estimated that examines the acquisition of internal and external
total assets of $2.2 trillion were held by some equity. Internal equity is capital that is obtained
5 million small businesses in 1998 with about from the existing owners, their relatives, new or
$870 billion of equity capital, or net worth, used existing partners or from retained profits within
the firm. External equity is capital obtained
from sources other than existing shareholders or
Final version accepted on February 22, 2006
their relatives. While an extensive literature ex-
Charles Ou ists on the availability of equity capital to small
U.S. Small Business Administration business, almost all of this literature focuses on
409 3rd Street SW, Suite 5000, Washington, DC 20416, USA the supply of external equity capital from the
E-mail: public markets (the initial public offerings), or-
George W. Haynes ganized private equity markets (venture capital)
Montana State University and, to a more limited extent, informal equity
205B Herrick Hall, Bozeman, MT 59717, USA capital markets (angels). This study examines
E-mail: the demand for additional internal and external

is used more widely by small where they play a complementary role (Freear business owners. Fenn and where financial intermediaries deploy funds to Liange. The upstart firm may solicit firms and their owners play an important role in angel capital initially and replace this capital the acquisition of internal and external equity with venture capital as the firm grows beyond capital. 2002). Life style risk preference (Bolton and Freixas. opaque firms (Schmid. Kuratko et al. and Freixas (2000) examined the business risk Modern information based theory of security profile and found that riskier firms prefer bank design and the notion of a financial pecking or. 2002). very risk tolerant and that education. Literature review dependent upon the information held by sup- The private equity market used by small firms is pliers of debt or equity capital. trade credit and angel financing. technology firms. 2001) will determine what type knows a limited amount of information about of financial capital the small business owner will the firm or their products. race. 1997. and net worth. these firms offer the and bond markets used by large firms. 1998. 1993). (Berger and Udell. Startup firms are typically informationally 1997) and risk preferences (Bolton and Freixas. 2001) where the lender 2000. somewhat safer firms prefer equity and der also help explain the financing of small firms bonds where they avoid intermediation costs. personal et al. 1998). Bolton and Udell. and Udell. selected small business ventures. loans. Internal equity. Monitoring (Diamond. either in the sources of financial capital. the goal of wealth maximization in choosing cial capital provided by the owners. have a substantially higher ally opaque and contrasts significantly from the probability of acquiring external equity than more informationally transparent public stock other firms. Car.. 1993. The goals and objectives of the family and business (Barton and Mathews. Xaio et al. adverse selection (Myers and Majluf. where individuals variable profits.158 Charles Ou and George W. however these firms have highly informal angel capital market. form of owner loans or internal equity. suppliers of financial capital and small business penter and Peterson. internal life style preferences were just as important as equity. 1998). age.. Finan. especially high growth rather complex contracts that are information. Pecking order theory would suggest that external debt be employed before external equity. Carpenter and Peterson. External angel and venture capitalist the expectation of equity raised by small firms originates in the high returns. 2000. 1997). 1995). 1989. Xiao et al. Haynes equity capital by small business owners using the monitoring and adverse selection challenges information collected in the Survey of Small would favor external debt. goals of the family owners. Angel and venture capitalist funding is inter- primarily in the form of owner contributions connected as these firms grow and develop. or the venture capital market. over the growth cycle. hence these firms are pursue. Petty and their business and their risk preference are and Bygraves. Costly in determining their risk taking attitudes and . 1998. however this argument is 2. and critical in finding the right match. On one hand. The characteristics of small and Wetzel. 2001). Fenn and Liange. financial security and autonomy (Kuratko et al. Xaio preferences (Petty and Bygraves. Petty and Bygraves (1993) found that more dependent upon owner loans. (2001) found that business owners are 1984). Kuratko et al. Those factors include growth stage the funding capacity of the angel investor. access to debt (Timmons. while moral hazard Business Finances (for 1993 and 1998) by the challenges would favor external equity (Berger Federal Reserve Board. especially interesting because it is often involves Some types of firms. 1997. substantial information asym- invest directly in small companies through an metries and a lack of collateral which limits their equity contract.. 1984) and moral hazard impose additional costs and personal net worth were important factors on suppliers of debt or equity capital. increase (1997) found that personal financial security and substantially as the firm approaches middle age autonomy were as critical as business financial from 25 to 40 percent of total financing (Berger goals in pursuing financing alternatives. 1998) industrial classification Some matching occurs between potential (Timmons..

equity capital capital. potential appreciation in the value of the busi- Two circumstances give rise to this cash ness. tions. Acquisition of Additional Equity 159 behaviors. but native sources is lacking. the high risk of failures in- from regular financing sources. 30–50 percent return on investment Moreover. Using equity entrepreneurs. Equity capital provides management of the business as well as the profit long-term funding with minimal cash flow potential of a business operation. borrowing.. and investment by private equity investors. raised in the IPO market. debts. (2) when a rather choosing a growth strategy that maxi- growing business generates a rapidly rising cash mizes the wealth growth potential. In the latter case. expected cash inflow falls short of the expected Many factors determine the demand and the cash outflow. The demand for internal and external equity demand for equity capital by a special group of capital by small firms – some conceptual small firms with high growth potential and high considerations risk. The capital needs can be fulfilled supply of this type of equity capital. In the first case. Equity capital can be used The previous studies have examined the to meet these distress or expansion needs. capital sources: (1) One when a firm experiences What is involved may not be choosing among financial distress and the financing from alter. Other work suggests that graduate market(s) that they are faced with prolonged education significantly influenced the odds of cash shortages. istics (high and low financial risk) of the busi- ness on the acquisition of additional equity 3. The prospect of a . decisions involved in borrowing and external equity capital by examining the char. determinants of the demand for internal and However. control of the business need to be balanced with cating that the firm has the ‘‘winning approval the prospects for faster business growth and of sophisticated financial professionals’’. and external equity. This is a very special kind of 3. 2003).2 To these entrepreneurs.. control and period of cash shortages. and. with the prospect of experiencing a prolonged It involves sharing of the vision. This study extends these earlier studies by ital is supplied to meet different market condi- examining the influence of financial character. say 5–7 years during the to create new products and services for new pre-boom period of late 1990s. volved in launching a dynamic growing business the firm needs working capital or cash to avoid demand a high return on investment as com- defaulting on loans and risking foreclosure pensation. investments by equity investors also to the investors. High return on investment is possible or bankruptcy. High costs of drains typically associated with a debt financing. the high only in ventures with high growth potential in a growth young firms need to spend so much cash relatively short period. the availability of shortage that require financing from equity alternative financing may not be that relevant. The next section Most of the existing literature on the demand examines conceptual considerations in assessing for equity capital concentrates on the uses of the demand for internal and external equity external equity capital – e.1. getting equity capital from capital has usually been touted as a preferred investors should be looked upon as an effort to form of financing for young promising firms invite strategic partners to grow a joint venture. Internal and external equity cap- firm. Demand for external equity by dynamic capital and the relationship (complements or ventures substitutes) between internal and external equity and other sources of capital. plus the potential costs of losing enhance the creditability of a new firm by indi. External equity investors often prefer this A firm’s demand for capital arises when the type of firm. from extending loans. venture capital from venture capital firms. Uncertainty about the firm’s using external equity financing by women expansion prospects discourages regular lenders entrepreneurs (Carter et al. To the by either debt or equity capital. lending equity capital for these two cases are acteristics of the business owner and business very different. internal equity.g. outflow that outpaces the growth in cash inflow For investors.

2002. The following hypotheses on the firms utilizing venture capital. some equity capital will be examined: 100. Younger firms are more likely to acquire addi- growing local market(s).S. Equity capital can be used to entrepreneur(s) to grow the business venture to relieve the firm in distress from the liquidity a certain size.160 Charles Ou and George W. financing sources is an important consideration plementary as well as substitutive to the use of for lenders and small business owners. acquiring new assets or bridging the cash flow gaps caused by expected (and seasonal) or The financial condition of the small business unexpected imbalances in cash flows. Of the 5.4 (1998). In this acquiring additional equity financing has not respect. since owner’s condition) firms. Lower quality (weaker financial condition) ence to external sources) and the high agency firms are more likely to acquire addition equity costs of borrowing from external sources are financing than higher quality (stronger financial most relevant here. relative costs of alternative financing sources. most likely. 1998. the tional equity financing than older firms. They also fore these investors demand a high potential help improve the debt equity ratios that enhance return. the use of internal equity capital is com. 2003) but not strained. we would 3. Fast growth is one major characteristic of internal equity. The relationship between equity and other sets). equity is a very important component of a business’s collateral (in addition to physical as. and the choice between internal and external sources 3. where use is affected by the availability examined. 4.3 million acquisition of additional internal and external small firms with employees in the U. pressure in making a loan payment. High sales growth firms are more likely to ac- of financing to meet different kinds of demand quire additional equity than low sales growth arising from regular business operations. Use of equity capital by most small firms expect the following: Most small firms are not dynamic ventures. the use of equity capital is the outcome been explored by others. there. growth stage is an important determi- nant of the acquisition of additional equity capital. Based on this earlier work.5 However.2. For these firms. Papadimitriou and Mourdoukou- businesses is likely to be more supply con. It involves the development internal sources of capital such as owner’s equity and collaboration of a business strategy with the or owner’s loans.3 Investing in from either debt capital with owner collateral or such a business also involves more than just personal guarantees. the chance of obtaining debt financing. It is difficult to estimate how many small For most small firms.S. therefore we would expect the following: The pecking order theory of the uses of financ- ing sources (ranking internal sources in prefer.6 ing and financing from other traditional and . This study examines the differences in and the relative costs of internal sources of funds the relationship between internal equity financ- versus debt financing from outside sources. it is the supply of businesses have the characteristics that would internal savings and external debt that will be make them attractive to equity investors in the the most relevant in assessing their use of U. Lower quality (higher of financing decisions on the use of internal financial risk) small businesses are likely to face funding conditioned by the availability and the lower supplies of all types of financial capital.000 of them may qualify to become Based on earlier work by Berger and Udell the investment targets of equity investors. which has financing from financial institutions. Smaller firms are more likely to acquire addi- part of the overall financing decision involving tional equity than larger firms. such as firms. tas. demand for equity capital arises as an integral 2. from providing financing. They do not grow or grow only steadily to serve 1. Tucker and Lean. and. The financial risk is high. Haynes rapidly expanding sales and profit is the only Financing for a business in distress will come way to attract venture capital. been mentioned by several authors (Berger and The uses of equity capital by non-dynamic Udell.000–200.

the net profit . (the 1998 SSBF and the NSSBF for 1993) were finance companies. Acquisition of Additional Equity 161 non-traditional sources. includes owner loans. other businesses. firms in the total sample of 8. government. Ei ¼ a0 þ a1 FD þ a2 CU þ a3 YD þ e ces. or from new or existing partners. tional equity financing than other firms not did [FIRM] obtain additional equity capital using other internal financing sources. their relatives. gal organization. During (1998/the fiscal year ending [DATE]). thrifts. hence we has the firm obtained additional equity capital would expect the following: from existing owners. These variables are included to show the existing owners. about additional equity acquired during the such as owner loans or personal and business previous year and used the following question: credit cards. The is the national survey conducted by the Federal statistical model employed for this study is Reserve Board of Governors for information on specified as follows: small business use of different financing sour. and from existing owners. le- oversampling of selected populations. Firms with loans from traditional and non. All analyses employed in FD the firm demographic variables. The for year 1998 was included. Only 80 without loans. are more likely to acquire addi. Internal equity capital is obtained from lenders. the internal equity models using the combined. or existing shareholders? However. Traditional sources in 1993 survey. census regions. We expect internal equity equity acquired over the last 3 years and used financing will complement other sources of the following question: During the last 3 years. and ysis. Firms using other internal financing sources.7 This study utilizes all of the observations from 1993 to 1998 surveys and distinguishes where E is the acquisition of additional equity small businesses by their use of internal and capital (i=internal or external equity capital). commercial banks. still permits limited testing of hypotheses related quire additional equity financing than firms to small firm uses of external equity. It also allows us to tions. dependent variables (uses internal equity and The same independent variables are used in uses external equity) in this analysis are dichot. and leasing used separately and combined to increase the companies. 1993 only and 1998 only datasets. omous. new or existing partners. The 1998 survey asked 5. brokerage firms. are survey to determine the use of internal and used as proxy variables for the demand condi- external equity capital. The of the Federal Reserve to compensate for the variables for the standard industrial groups. a dummy variable than existing shareholders or their relatives. The 1993 survey asked about additional other individuals. financing for small business owners. include age. and urban location. woman and minority owner- This study utilized three questions from the ship. external equity capital. examine the firm’s use of equity financing in personal and business credit cards. this study use the population weights generated number of employees. External used. profit- by the research staff at the Board of Governors ability and quality of the firm (Altman Z). the database traditional institutions are more likely to ac. data collected in both surveys include credit unions. and recent conjunction with other debt capital used by the loans from traditional and non-traditional firm. Given the Although data collected on the uses of equity small number of respondents acquiring addi- in 1998 differed slightly from the uses of equity tional external equity in 1998. and YD is the year dummy. This study uses logistic regression models to 4. growth in sales. 6. Since two equity capital is obtained from sources other survey years were combined.8 CU the capital use. Empirical considerations assess the key determinants of the acquisition of The Survey of Small Business Finances (SSBF) internal and external equity by small firms. Non-traditional sources include number of observations for the statistical anal- families.100 firms (for two surveys) were found to have used external equity capital. their relatives or from new and importance of alternative financing sources existing partners over the past 3 years.

cated by lower Altman Z ratios). Among those 13 4 years old or firms 4 or more years old. and external equity capital by small businesses. They were more likely to hold families.162 Charles Ou and George W. A logistic corporations. and leasing smaller. were was acquired by less than 1 percent of the firms lower quality and were more likely to have used in this study (King and Zeng. and reside in urban locations. commercial banks. Standard logistic regression models are used transportation. which used any additional equity during the previous 1 uses a dummy variable to identify firms less than or 3 years of the two surveys. industrial classification and census re. more likely to use business credit . 1993 and 1998 (Table II). Only 5 percent of sources of internal financing. Non-traditional institutions include quality (Table I).9 Table I shows the proportion of small busi. less profitable and lower financial companies. where additional external equity or increasing sales. very rare events is employed to examine the The firms most likely to have acquired addi- determinants of the acquisition of external tional external equity were younger. are organized as This section utilizes descriptive tables and lo. finance companies. number per cent of small firms that acquired additional of employees. Two groups of users are distin. equity capital. Haynes margin. gion categories are collapsed. acquired external equity alone or with internal and recent loans from traditional and non-tra. wholesale trade or retail trade to examine the determinants of the acquisition than the services industry. The control variables suggest that these firms are more likely to be engaged in wholesale trade 5. quality of the firm. the owners’ loans and personal firms. these results should be used with caution. located in the North central rather regression algorithm with error corrections for than the West. The first analysis internal and external equity capital. The firms most likely to have acquired addi- clude credit unions. cards and have recently had a loan approved legal organization. firms’ acquisition of additional internal equity ing the determinants of acquiring additional capital using the combined data and data for internal (Table II) and external (Table III) each of the years. use personal and business credit individuals. The variables of Overall. government and other owner loans. Multivariate analyses were performed to test nesses. measured by equity capital. acquiring additional internal and equity capital. profit margin). thrifts. had stable equity capital. almost all of them of them ac- the net profit margin and Altman Z statistic. Given the small number of firms minants of the acquisition of additional internal acquiring additional external equity capital. woman or minority owner. Traditional institutions in. tional internal equity were somewhat younger. 2001). more likely to be engaged in manufacturing. including owner those that acquired additional equity capital loans and personal and business credit cards. quired only internal equity. The ship. Firms with a higher probability of acquiring Table I provides a description of the various additional internal equity capital are younger types of firms that have acquired additional (less than 4 years old). lower financial quality (as indi- guished – users of internal and external equity. ditional institutions. regular corporations and are less likely to reside gistic regression models to assess the key deter. organized as regular of additional internal equity capital. used any additional external equity capital. and location (census region and urban or control variables suggest that these firms were rural) are included as control variables. Results than the services industry. in rural areas. brokerage firms. were less profitable. other businesses. owner loans and business credit cards. differentiated by demographic and the major hypotheses for acquiring additional financial characteristics. equity. 87 percent of firms surveyed had not interest in this study are the age of firm. Less than 1 percent of all firms surveyed credit cards). with a traditional or non-traditional lender. less profitable (lower equity capital. The firm’s industrial classification. more likely to Certainly the most striking result is the use non-traditional sources of financing insignificance of external equity capital by small (especially. Tables II examines various factors that influence the and III report logistic regression results assess.

131* 0.115 0.005 Yes 0.098 0.183* 0.003 Firm quality Lowest 25 %1 0.104 0.002 Greater than 50 %1 0.005* Number of employees 01 0.256* 0.000 1–4 0.005 Stable or Increasing sales 0.008 Services1 0.219 0.006 10 %–30 % 0.006 Age of the Business Less than 4 years 0. yes/no No 0.004 Yes 0.023 Sales growth Decreasing sales 0.010 20–99 0.111* 0.130* 0.003 .002* Owner loans.011 10–19 0.122 0.006 Insurance agents and real estate 0.006 Yes 0.004 5–9 0.155 0.107 0.260* 0.008 Highest 25 % 0.141* 0.007 Standard industrial classification Mining and construction 0.008* Profit margin 0 % or less 0.138* 0.005 Yes 0.123 0.003 Manufacturing 0.009* Approved by a traditional institution for recent loan No 0.009 Middle (25 %–75 %) 0.124* 0.126 0.023* Retail trade 0.060 0.008 Approved by a non-traditional institution for recent loan No 0.142* 0.013 100–499 0.108* 0.122 0.005 Transportation 0.152* 0.182* 0.115 0.001 Wholesale trade 0.004 Yes 0.016* Uses personal credit cards.152* 0.011* 0 %–10 % 0.078* 0.007 Uses business credit cards.142* 0.138* 0.014 4 years or more 0.100 0.005 30 %–50 % 0. Acquisition of Additional Equity 163 TABLE I Proportion of all small businesses acquiring additional equity capital Characteristics Internal equity External equity All firms 0.113 0.111 0. yes/no No 0. yes/no No 0.137 0.102 0.152* 0.119* 0.

acquired additional external equity capital. The results generated from the combined Census Region and residing in an urban loca- the data set were quite robust across the 2 years tion. . organized loan from a traditional or non-traditional len. located in the Southern der.124 0.003 Northcentral 0.116 0. Younger and capital.124 0. cards.148* 0.006 Yes 0. The Only a very small number of small firms control variables suggest that external factors. The age variable was statistically signifi- NSSBF) was highly significant indicating that cant in the combined and 1998 data regressions.007 West1 0. Haynes TABLE I Continued Characteristics Internal equity External equity Regular corporation No 0. The results for 1993.004 Census region Northeast 0. are important determinants of additional (1993 and 1998) and supported all but one of internal equity capital acquisition. which were not significant in the 1993 data. our hypotheses. indicated that firm quality was not a engaged in the service industry.007* 1 Reference category for the statistical comparisons.114 0.127* 0.004 Location Rural 0. * Level of significance is 5 percent. Using only the years was warranted.164 Charles Ou and George W. separate regression estimates for the individual but not in the 1993 regression.140* 0. The control variables suggest that firms. a fairly prosperous firms engaged in wholesale trade are more likely year with heightened activity in new venture to acquire additional external equity than firms financing.118 0.006 Yes 0. The most unstable vari- 6. indicated the prominence of internal more likely to have acquired additional external equity capital acquisition by financially weaker equity capital. and more likely to have acquired a recent such as being engaged in retail trade. The growth in sales variable The second analysis utilizes a rare events lo- was statistically significant in the 1998 data. a year 1998 data.004 Yes 0. as a regular corporation.009 South 0.006 Minority-owned business No 0.125 0. Conclusions ables were the net profit margin categories. gistic regression to examine various factors that indicating that higher growth firms were less influence the firms’ acquisition of additional likely to have acquired additional internal equity external equity capital (Table III).118 0. The firm quality and use of business larger firms were more likely to acquire addi- credit cards variables were not significant in the tional external capital than other firms in this 1998 data.002 Urban 0. The year variable (data from 1998 study.117 0.012* Women-owned business No 0. statistically significant factor in acquiring addi- tional internal equity. The results for 1998. it appears that firms acquiring a re- of weak recovery from the severe recession of cent loan from a non-traditional lender were 1990–1991.109 0.

0001 0.2518 Woman-owend business 0.0657 0.2217 0.8659 –0.0001 Uses personal credit cards 0.4836 North east region 0.7309 Transportation 0.0086 0.0001 –2.1796 –0.3079 0.2103 0.0001 0.9592 0.0004 0.0676 0.0489 1.0864 0.0044 Recent loan from non-traditional lender 0.1825 0.1984 0.0037 Net profit 30–50% 0.3893 0. is one of the two most important sion to examine the acquisition of additional sources of financing for most small firms.5229 0.9991 0.5338 0.4340 0.4898 0.0140 0.2167 0.3082 0.3465 0.070 0.0343 0.0758 0.3551 Uses owner loans 0.2694 0.4661 –0.8187 Urban location 0. excluding sole proprietors for two different financing situations.6131 0.0001 1.0266 0.3776 0.0360 0.0001 0.0012 0.3137 0.2302 –0.7902 0.2423 0.089 Number of observations 8.7149 –0. however this financing as compared with some 50 percent for study utilizes standard logistic regression to the users of financing from commercial banks.1471 0.8185 0. far external equity.0020 0.0336 Net profit 0 or less 0.2625 0.0001 –3.1422 0.0293 0.6915 0.6896 0.4500 0.2452 0.3801 –0.5659 North central region 0.3734 0. regular –0.8599 0.8568 0.5814 0.1938 0.0479 –0. Acquisition of Additional Equity 165 TABLE II Logistic regression summary of the determinants of internal equity use Variables Combined 1993 Only 1998 Only Parameter p-value Parameter p-value Parameter p-value estimate estimate estimate Intercept –2.0027 0.0998 0.1041 0.0246 0.0001 0.1686 –0.113 0.0001 McFadden R-squared 0. er’s loans.5727 Manufacturing 0.0526 0.3817 0.1364 0.0997 0.1709 0.5131 0.0145 –0.1389 0. internal equity and own- equity and employs rare events logistic regres.0028 0.7363 Data from 1998 NSSBF –1.0079 0.0980 Corporation.4106 0.0029 0.0002 0.0003 0.0855 0.6543 Minority-owned business 0.5678 0.0861 0.8167 0.0024 –0.4434 Southern region 0.2555 0.2348 0.2302 Net profit 10–30% 0.1696 0.0537 0.9930 Retail trade 0.0225 0.0721 0.0224 –0.2393 0.3297 0.2403 0.0648 0.4474 0.3161 0.3507 0.4884 0.2620 Growth in sales –0.3664 0.1919 0.1065 0.1163 0.7846 0.2160 Recent loan from traditional lender 0.0054 –0.0022 –0.0237 0.4005 0.2843 0. some 38 percent (equity capital from external sources) from the of small firms acquired additional internal national surveys are too limited.0041 –0.1384 0.637 3.5430 0.1136 0.0001 0.0001 Uses business credit cards 0.2018 0.2969 Wholesale trade 0. surpassing all other sources of financing and The significance of these variables in identi.2003 Quality of firm (Altman Z) –0.0908 0.0536 0.11 importance of internal financing as an integral Internal financing had been used in conjunc- part of the overall financing decision by most tion with different external financing sources small firms. of internal equity and owners’ loans in combi- stand because the intermingling of business nation with the uses of such non-traditional .198 4.0011 Number of employees –0.2825 0.1298 0.2675 0.0045 0. less than 4-years old 0.0145 0.6697 0. The uses whose business finances are difficult to under.2915 0.0001 Young. In fact.7301 Insurance agents and real estate 0.5076 0.0029 0.0001 0.10 examine the acquisition of additional internal The combined source.0001 Net profit 0–10% 0. even rivaling the financing provided by com- fying the internal equity users exemplifies the mercial banks.0015 –0.2706 0.4275 0.561 Information on the uses of venture capital finances and personal finances.0157 Control variables Mining and construction 0.1576 0.0025 0.1135 1.0001 0.

9460 –0.9530 –1. especially younger firms and firms in likely to acquire additional internal equity than financial distress.3321 0.158 0.0030 Number of employees 0. Younger firms were more small firms.3922 0.9791 0.2041 0.0000 Growth in sales 0.2020 0.4082 0.5940 0.0116 0.561 sources as personal credit cards and lending majority of small firms relied on internal sources from non-commercial institutions by companies of capital (owner’s capital and owner’s loans) in poor financial condition implies that internal and external borrowing from commercial insti- equity is often a last resort to relieve financial tutions to finance their business operation and stress confronting small firms.1970 Recent loan from traditional lender –0.2292 0.1361 0.7096 0.3137 0.1280 0.6279 0.1090 1.5613 0.2380 Uses personal credit cards 0.6010 – – Urban location 0.0098 0.1050 0.3750 0.0020 2.3600 1.9350 Uses owner loans 0.2934 0.6119 0.268 Number of observations 8.1560 0.0227 0.3118 0.1320 – – Manufacturing 0.2394 0.2040 0. to borrowing traditional sources from financial institutions.1400 0.7670 Net profit 10–30% 0.7346 0.7507 0.3966 0.9680 –0.7012 0.9835 0.5870 0.3300 0.1780 0.5400 0.6564 0.2561 0.7854 0.5510 –0.7263 0. Haynes TABLE III Logistic regression summary of the determinants of external equity use Variables Combined 1993 Only 1998 Only Parameter p-value Parameter p-value Parameter p-value estimate estimate estimate Intercept –7.2750 0.1459 0.3173 0.0130 Control variables Mining and construction 0.2358 0.1550 Net profit 0 –10% –0. Internal financing is used in conjunction higher quality firms.2360 1.8171 0.2758 0. .7462 0.3889 0.6840 Data from 1998 NSSBF –0.0454 0.1920 3.0790 Retail trade 0.4592 0. There is also indication of the comple- equity.5437 0. less than 4 years old 1.0529 0.6880 –0. not external lenders.0063 0.0676 0.0850 1.9390 0.3861 0.4290 – – Quality of firm (Altman Z) –0.8930 Recent loan from non-traditional lender 0.4582 0.0980 0.6500 Minority-owned business –0.1341 0.7564 0.4470 0. which is one of the two major financing mentary of uses between internal sources and sources for most of small firms in the U.8480 1.7340 Woman-owend business 0. the pecking order of uses of different financing tional sources because of the unavailability of sources – from internal sources.3365 0.2490 – – Southern region 0.0000 –7.2710 Uses business credit cards 0.3808 0.0030 1.1685 0.7408 0.7470 1.4335 0.2394 0.0000 Young.9122 0.166 Charles Ou and George W.3808 0.0580 0.2510 McFadden R-squared 0. from traditional institutions and non-traditional It is the internal equity capital.5290 0.4141 0.0000 –8.1690 0.3670 – – North central region 0. That is.1114 0.1258 0.7160 Transportation 0.9900 –0.6208 0.1200 0.2490 Corporation.0000 0.198 4.7220 Net profit 0 or less 0.0507 0.9644 0.6900 1.1730 Net profit 30–50% –0.4410 0. There were indications of with the uses of other sources from non-tradi.1750 0.1860 1.8630 1.0010 0.0015 0.0147 0.S.2817 0.0079 0.1360 – – Wholesale trade 1.5340 –0. many business growth.2770 1.0980 –0.6360 0. and lower quality firms were more internal equity to meet the emergency needs for likely to acquire additional internal equity than cash.0540 0.6890 Insurance agents and real estate 0.0000 0.3360 0.7266 0.6490 –0.2000 0. had acquired additional older firms.3444 0.1110 0.5729 0.A the borrowing from commercial lenders.172 0.6642 0.8810 North east region –0.6328 0.637 3.6016 0.8160 –0.0081 0. regular 0.

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