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Regulations Creating Obstacles to Small Business Financing

A trio of researchers from George Mason University have released a working paper about small business financing after the 2008 financial crisis. As could be surmised from the location of the GMU campuses near the District of Columbia, the paper is particularly cognizant of the effect of government regulations on the ability of small businesses to finance themselves.

The August 2016 working paper, Small-Business Financing after the Financial Crisis: Lessons from the Literature by Stephen Matteo Miller, Adam Hoffer, and David Wille, summarizes in its abstract:

We survey the literature on how small businesses in the United States finance themselves. Our results demonstrate the important role that the financial services industry, particularly bank credit, plays in the capital structure of small firms. The results also reinforce the importance of owner equity as a primary source of financing. In addition, we find that small firms have been seeking and obtaining less capital since the 2008 financial crisis. Our findings about the main sources of small-business financing will be informative when formulating financial regulation. The available evidence suggests that new regulation of the financial services industry may be restricting access to products that small-business owners rely on and may adversely affect small banks. — Stephen  Mateo Miller, Adam Hoffer, David Wille, Mercatus Center, George Mason University

Among the primary lessons learned from the trio's literature review are:

  • Research into the capital structure of small businesses confirms the important role of external credit for financing and thus the important role of the financial services industry.
  • The available data indicate that small-firm financing remains weak, a trend that is linked to the persistently low level of small-business lending since the 2008 financial crisis. 
  • New regulation of the financial services industry since the 2008 financial crisis may be restricting access to financial products that small-business owners rely on and may adversely affect small and community banks, which generate about half of all small- business lending in the United States. — Miller, Hoffer, Wille, George Mason University

Access the short 2-page summary here and the full 49-page working paper here.


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